There are many benefits to being self-employed as a freelancer. You can essentially choose your own schedule. You control which clients you work with. And, if you’re willing to put in the time and effort, there is really no limit to how much money you can make.
But, there are some potential risks involved in self-employment. Consistency with your income could become a problem. There are going to be times of feast and famine with your work, especially with so much uncertainty currently affecting our economy. Unfortunately, that can end up hurting more than your wallet.
While there is no direct correlation between self-employment and your credit score, some creditors might consider your career a risk. So, what happens if you want to buy a house or a car? What about something as simple as applying for a credit card?
The good news is, it’s possible to have great credit as a freelancer. You can even end up with a perfect credit score if you’re willing to play it safe and make smart financial choices. With that in mind, let’s take a look at what factors into your credit, how you can improve upon your score, and what you should do when you want to apply for a loan.
What Factors Into Your Credit Score?
Multiple factors affect your credit score. It’s more than just the amount of money you make or your employment history. While some credit reports contain personal information – including past employment – not all of them do. Additionally, lenders aren’t required to pass on your employment history to creditors. Some do, but because it’s not the only factor, it’s also not a crucial component for creditors.
So, what else factors into your credit score? According to FICO, five categories make up your score at different percentages for each. They are:
- Amounts owed (30%)
- New credit (10%)
- Length of credit history (15%)
- Payment history (35%)
- Credit mix (10%)
Your credit score is only calculated based on these five factors. However, when a lender looks at your report, they might go one step further and look at your employment history and income. So, while your score won’t be affected by your job, your ability to get a loan could be, depending on the person reviewing your report.
How to Maintain or Improve Your Credit
As someone who is self-employed, you should strive to maintain good credit or improve it whenever possible. Thankfully, that’s easier than you might think. It’s important to remember that when you’re a freelancer, you’re working as your own business. That means you have to be in full control over managing your finances.
If you’re not, you could run into some trouble. For example, you can damage your credit score by defaulting on an existing loan. Making sure you have enough money each month to pay your bills (including loans) will help to maintain, and possibly improve your current credit score. If your income fluctuates each month, build your budget on the lower side to give yourself some wiggle room.
Sometimes, your income might feel inconsistent because you aren’t collecting from clients in a timely manner. Creating professional invoices can help you make sure you’re getting paid on time and in full for the services you provide. Sending out an invoice right away will give you a clearer picture of how much you actually make each month, and how you can/should adjust your budget.
Another way to quickly improve your credit is to pay off existing debts. Even if you can’t pay off everything, making a large, lump-sum payment will make a big difference in boosting your score. That can help you with everything from getting approved for a credit card to getting accepted for a loan.
Looking for a Loan?
Chances are, you’re wondering about how self-employment affects your credit because you’re thinking about the importance of your credit score – likely, for a reason. Maybe you want to apply for a new credit card. Or, maybe you’re considering taking out a loan for a large purchase.
Again, there is no direct correlation between self-employment and your credit score. But, if a bank does see that you’re self-employed, they might be hesitant to give you what you’re asking, even if you can prove that you make a livable wage.
The first thing you can do is to prove consistency with your credit. Show the bank a history of your credit reports, especially if you’ve been working on improving your score. You can also show employment history, especially if there haven’t been many dips in your regular income.
If you’re still worried about getting a loan or you’ve been rejected before, consider:
- Going through a credit union instead of a bank
- Using a co-signer
- Making an offer of collateral to secure the loan
- Offering a large down payment
Being self-employed can be a red flag for some creditors. Even though it doesn’t affect your credit, you should do whatever you can to make your credit report look strong, especially if you plan on taking out a loan or making a big purchase soon. Keep the tips listed here in mind to avoid certain practices and to potentially give your score a boost.
Read more Freelance Business Tips
Featured Image Source: Pexels
0
65k
6k
Leave a Reply