September 30th, 2013
**Today’s guest post is contributed by Carrie.**
Being your own boss has some great benefits, with one of the main ones being the freedom and flexibility to do with your time as you please. However, with that freedom comes a big obstacle — it’s difficult to build credit.
This is something I discovered after I quit my job in May 2013 and had to rely on my own income for stability, paying the bills, and of course, building credit.
Thankfully, you can still build credit as a self-employed freelancer by using these five unconventional strategies.
1. Collect proof to verify self-employment income
One of the main reasons it’s hard to obtain a credit card or loan as a freelancer is because it’s not easy to verify your income. It’s not like the financial institution can pull records of your W-2’s, because self-employment income is a lot more inconsistent.
However, if you’ve been freelancing for more than a year, you can use your past tax returns as a way to verify your annual income.
Another way to collect proof of self-employment income is to gather any bank statements and investment or savings account balances. If your business is doing well, or if you’re a smart saver, having a good chunk of money lying around can be used as collateral, and prove that you’re a solid candidate for loaning money to.
2. Authenticate your business by incorporating
If you’re interested in giving yourself a pay stub like a regular employee, you can incorporate or become an LLC. This will prove you’re serious about your business, and show that you’re running a legitimate business.
You’ll be able to pay yourself as an employee, and it will look as if you’re working for any other type of company to the lenders. Plus you can potentially qualify for certain tax benefits, so incorporating is worth considering.
3. Take out credit in the company’s name
After setting up the legal identity of your business, it’s time to open bank accounts, credit with vendors, and even credit cards under the business’ name. Just like personal credit and bank accounts, any financial information you have will be reported to the credit bureaus.
So if you’re trying to establish credit as a self-employed business owner, there are major advantages to opening business credit versus credit under your personal name. You can even take advantage of promotional interest rates to pay for any business expenses. It’s a win-win to help with cash flow and your financial history.
Having no credit is better than having bad credit, so if your business is new you can start from scratch to build a solid credit history.
4. Use unconventional methods
You ecredable.com and WilliamPaid, you can build credit just by paying your rent, utilities, cell phone, insurance, and other bills. These services have made it easy (and nearly free) for you to leverage your monthly bills to prove you’re a solid candidate for loans and other financial products.
Using debt to build credit is a thing of the past, so don’t be afraid to buck the trends and find your own methods for proof of income or payment history.
5. Keep your personal credit up-to-date
As a sole-proprietor (even one that’s an LLC), your personal credit history is tied to that of your business and vice-versa. So be sure to keep your report clean, check for errors regularly, and pay your bills on time.
Your credit score is made up of five components:
- Payment history — 35%
- Amounts owed — 30%
- How long you’ve had credit — 15%
- New credit — 10%
- Mix of credit products — 10%
As long as you keep each those top components in mind, you’ll be able to improve your personal and business credit score with very little issues.
If a loan officer sees you have a solid history of making payments on time and are able to control the amount of debt you owe, they generally will have no problem working with you and your business.
What’s another way you can build credit as a freelancer?
Carrie Smith is the owner and editor of Careful Cents, a blog that specializes in helping serious solopreneurs and full-time freelancers earn more money in less time through systems and financial organization. She also writes for The Huffington Post, AllBusiness Experts and several other business websites. You can find her on Twitter @carefulcents.
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September 25th, 2013
One of my favorite shows on TV right now is Project Runway, a reality competition where fashion designers fight for the top prize. I’m in no way a fashionista, but it’s really amazing to see what the contestants can produce within a mere 1-2 days. It’s probably hard to imagine that a silly reality TV show has anything to do with finances, but where there’s a will, there’s a way… to make it work! Sew keep reading for cleverly designed analogies, bad puns, and maybe some financial advice.
July 31st, 2012
Building a solid credit history and saving money don’t always go hand in hand. The essence of building credit means you’re paying back borrowed money to establish a good reputation, so you can borrow more money (at a lower interest rate) in the future.
January 31st, 2012
It may be difficult to rebuild rock-bottom credit, but it’s not impossible. We constantly hear of Credit Karma members boosting their scores after several months of belt-tightening and smart credit moves, so if they can do it, so can you!
September 9th, 2011
Ready to take the plunge into becoming a homeowner? Make sure your credit is in tip-top shape first! Check out these tips, from our Credit Advisor, Justine Rivero.
September 13th, 2010
Pass on this quick & dirty guide to building good credit to your college-bound friends and family, whether it’s they are freshman year or seniors, so they can discover the right financial attitude while also soul-searching in college.
August 24th, 2010
Sometimes there are disagreements amongst Credit Karma consumers about how to handle certain situations—to close or not to close a credit card, to pay off this or that, and more. One thing is for sure—we’re proud Credit Karma consumers have something to say about it.
July 2nd, 2010
As we celebrate America’s Independence Day, why not start working on your own financial independence by better managing your credit score. In working towards financial independence, your credit score is a crucial initial step to better financial health, as well as something that stays with you throughout your entire life.
Since credit scores are calculated from your credit report, it’s a good and accurate snapshot of your general financial health. How does credit score = financial independence? In a nutshell, your credit score is your key to having financial options. The higher your credit score, the more doors it opens. Credit scores impact almost every financial product, specifically approval for credit cards, ability to borrow money, and interest rates offered by lenders.
Everyone’s path to financial independence will vary, but addressing the five main components of a credit score is a foundation you need to build:
April 14th, 2010
Broke college students, rejoice—the Citi Dividend Platinum Select Card for College Students is the best thing to happen to the college-aged crowd since instant noodles.
January 19th, 2010
Dear Credit Karma,
I have no credit. How do I start to build my credit if no one will approve me for a line of credit?
The best route for first-time credit users to build credit is with a secured credit card. Secured credit cards are similar to credit cards except they require a security deposit from the cardholder, and are effective at building good credit history because they have guaranteed approval and the security deposit guards against potential defaults. This means no late or missed payments to blemish your credit. However, the downside is the high costs, such as the security deposit (usually at least $200) and hefty initial and annual fees. Once you are approved, be sure to build good credit with responsible credit use and on-time payments; make it simple by using your card once a month for a small transaction, making sure to pay off your balance in full every month to avoid debt. Once you’ve established a solid credit card history, you can apply for a loan, mortgage, or an unsecured credit card and be offered improved terms and rates thanks to the healthy credit you’ve earned.
Another option to establish credit is to have someone with good credit co-sign a loan with the new credit user. However, co-signing can be a messy financial ordeal and should be carefully considered before proceeding.
Dear Credit Karma,
My Credit Karma score hasn’t moved in 3 months. With the deletion of several negative accounts and late payments, my TransUnion FICO score has increased by 50 points. Why is this?
Credit scores are determined by a combination of your personal credit data and a bureau-specific algorithm to score the data; typically credit scores do not match from one provider to another because the credit data and the scoring algorithm are very likely to be different between providers. This natural difference between credit score models may account for the point difference between your Credit Karma and TransUnion FICO score.
However, another explanation of why your Credit Karma score hasn’t changed at all is a possible error on your credit report. Check your credit report at all three credit bureaus to make sure the deletion of your negative accounts and late payments were accurately reported to the bureaus. If the report is accurate and up-to-date, your score should (but not guaranteed to) reflect your healthier credit file.
Dear Credit Karma,
I used to have a lot of various collections on my credit report, but I have paid all of them off except for my medical bills. My credit report shows them as paid and closed but my credit score hasn’t improved. Will I have to wait for them to be removed from my credit report in order for my score to go up? I feel like I’m working so hard to get things under control with no positive results.
Depending on how you resolved your credit collections, these negative marks will reflect in your credit score even after you’ve paid them off. According to FICO’s recent disclosure of credit score damage points, a late credit card payment can cost you 60-110 points and a debt settlement costs 45-125 points. While you took a smart step towards improving your credit by paying these derogatory accounts, your credit score won’t benefit immediately. Negative marks typically remain on your credit report for up to 7 years and will drag down your overall credit score regardless of your other accounts being in good standing. The good news is the affect on your credit score will decrease over time. Within a year of good credit behavior such as on-time payments and paying off more debts, you’ll see your hard work pay off in a healthier credit score.
Submit a question now, and maybe Credit Karma will answer your question on our next Q & A blog post!