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Amidst the uncertainties of 2020, the freelance sector has seen surprising stability and growth. Currently, there are around 59 million freelancers in the U.S., according to CNBC with the total annual freelance economy reaching $1.2 trillion. What’s more, 75% reported that they made the same earnings — or even more — when they were employed full-time. Regular BeingGuru contributor Hisham Sarwar has even gone on record stating that he made a seven-figure revenue as a freelancer.
However, despite the growing demand in the gig economy, these professionals still face hurdles that full-time employees are mostly spared. One of the most pressing concerns is building credit. This is mainly because, although freelancers enjoy more flexibility and even higher pay per project in some industries, cash flow can be unstable. This can affect your payments, therefore lowering your credit score.
Why a Good Credit Score Matters for Freelancers
The perfect credit score is 850, but the average FICO score in America is 710. Having a good credit score plays a role in applying for a mortgage, car loans, cellphone plans, and even job applications. Being self-employed can sometimes dissuade lenders as there are questions mark over whether you can actually honor the repayments. A report sponsored by the National Association of Background Screeners (NABS) also showed that 16% of companies conduct credit checks. In part, this is to gauge your own stability and credibility. With poor credit, you might not be able to qualify for loans you need or you might even get rejected from freelance gigs.
How to Raise Credit Scores Effectively
Admittedly, raising your credit score may require a bit more elbow grease as a freelancer. But this is only because you’ll need to supply more documentation since you don’t have a corporate entity verifying all this on your behalf. That being said, once you’ve gotten the hang of it, it’s more than possible for you to raise your credit score—and keep it up!
1. Collect proof of steady income
Because freelancers don’t receive regular salaries, it is up to you to prove the stability of your cash flow. Do this by keeping multiple copies of payslips, receipts, client checks, and bank statements. Since your clients are most likely sending you payments online, make sure you save copies of every bank transfer. If possible, when you arrange these files, do so in such a way that also shows a year-over-year increase. This will directly improve your odds, especially if you’re applying for a mortgage.
2. Ask your utility providers to report timely payments
For freelancers, aside from making payments on time, what may be more impressive for lenders is to see this verified by third parties. Petal Card encourages freelancers to ask their utility and phone providers to also report their timely payments. This helps bolster your responsible credit history, which will ultimately be taken into consideration in raising your credit score. A helpful tip may be to set automatic payments and reminders to update your providers that bills have been settled.
3. Regularly file your taxes
Take time to file your income taxes regularly. This will not only keep the IRS off your back, but it will also help qualify you for financing as a freelancer. Some lenders require at least two years’ worth of tax returns, so don’t miss filling them otherwise you will get penalized. If you’ve been freelancing for more than a year, the tax returns can also be considered proof of income. If you need help, a bookkeeper or accountant can give professional guidance. This may be extra helpful since freelance taxes and paperwork are significantly different.
4. Look into becoming an LLC or corporation
The U.S. Bureau of Labor Statistics projects a 7.9% growth rate in self-employment. If you’re planning to be in this for the long run, you may want to register as a sole proprietor. This means your business will be authenticated as an LLC or corporation. In this capacity, you can qualify for tax benefits. You can also boost your reputational credit with your own payslip, work domain, and company contact details.
While freelancing has many advantages, it does require a certain amount of grit and perseverance to be sustainable. To ensure the future of your career, prioritize your credit as early as possible. When you have a healthy credit score, you can continue to enjoy the benefits of being your own boss without any hiccups.
