Does Being Self-Employed Affect Your Credit?

Does Self-Employment Show Up on Your Credit Report?

Your credit report may include your past employment history, including any self-employment history, if a lender reported it to credit bureaus. But your employment status isn't a factor in your credit score.

Lenders typically ask for information about your job, employer, income and employment history when you apply for credit. They may report this information to credit bureaus, although they aren't required to do so.

Learn more: What's Not Included in Your Credit Report?

Why Self-Employment Can Make It Harder to Get Credit

Although self-employment doesn't directly impact your credit scores, it can cause lenders to scrutinize your income and documentation more carefully, which may make it harder to get credit.

Income Is Harder to Verify

While employees can simply provide W-2 forms or pay stubs to verify their income, verifying income for self-employed people is harder for lenders. Income from multiple sources, electronic payments through specialized payment platforms or payments deposited to both your personal and business bank accounts can make verifying income complex.

Income May Look Lower on Paper

Self-employment tax deductions can reduce your tax bill, but that can sometimes work against you. If your lender uses your tax returns to verify income, you might appear to earn less than your cash flow suggests.

Income Can Be Unpredictable

When you're self-employed, your income is likely to be less stable than that of an employee receiving a regular paycheck, especially when you're just starting out. Even if you've been self-employed for a long time, it's natural to have ups and downs due to seasonal fluctuations or customers who take a long time to pay their invoices.

Debt Can Work Against You

Many people take on debt to get a business going, but the combination of significant debt and variable income can make lenders wary of extending credit. In particular, lenders consider your debt-to-income ratio (DTI), which compares the total amount you owe every month to your total gross income. The maximum acceptable DTI depends on loan type and lender policies. In general, though, lower is better; a DTI that's too high could cause lenders to deny your application.

Learn more: How Do Lenders View Your Credit?

How to Get a Loan When Self-Employed

To get a loan when you're self-employed, follow these steps.

• Check your credit. You can get your credit reports from all three credit reporting bureaus (Experian, TransUnion and Equifax) from AnnualCreditReport.com. Review your reports to make sure they're complete and current. You have the right to dispute information on your credit report that you believe is inaccurate. You can also get your credit report and scores for free from Experian.
• Gather proof of income. Depending on the lender and loan type, documents used to verify income may include personal and business tax returns and bank statements, 1099s, profit and loss statements, contracts and invoices.
• Consider prequalification first. Prequalifying for a loan involves a soft credit inquiry (or soft pull), which doesn't impact your credit scores. It's a good way to shop around and find offers that you're more likely to qualify for. You can use Experian's loan comparison tool to get matched with personal loans that fit your credit profile.
• Borrow less. If you're applying for a car loan or mortgage, save up for a bigger down payment. Borrowing less reduces your costs and may make it easier to get approved.
• Consider a secured loan. A secured personal loan uses your savings account, investments, car or other assets as collateral. Secured loans may be easier to qualify for, but it's important to weigh the risk of losing your collateral if you can't pay the loan.
• Consider a cosigner or co-borrower. Applying with a cosigner or co-borrower who has good credit and a reliable income could make it easier to qualify for a loan. Just keep in mind that co-borrowers, unlike cosigners, have access to the loan proceeds.

Learn more: Things Lenders Look at Besides Your Credit Score

How to Get a Credit Card When Self-Employed

To get a credit card when you're self-employed, try these tips.

• Check your credit before applying. Review your credit reports and credit scores to see where you stand.
• Report income accurately. Review the card issuer's guidelines to see what income is eligible to include. For example, you may be able to include a spouse's or partner's income, investment or retirement income, or spousal support. Reporting all allowable income can improve your odds of approval and may help you qualify for a higher credit limit. (Check your records to ensure you can document any income you list.)
• Try prequalified offers first. Prequalification generally involves a soft credit check, which has no effect on your credit score. You can visit credit card issuer websites, check your mailbox or email for preapproved card offers, or use a card aggregator website like Experian's credit card comparison tool to find cards that fit your credit profile.
• Consider a secured credit card. Secured credit cards require a refundable deposit, typically $200 to $2,000, that's usually equal to your credit limit. The deposit serves as collateral, which can make it easier to qualify. Once you demonstrate responsible credit usage for a certain period, you may have the option to upgrade to an unsecured card.

Learn more: What Credit Card Should I Get?

How to Improve Your Credit Score When Self-Employed

If you're self-employed and planning to apply for credit in the near future, here are some things you can do to improve your credit score first.

• Pay your bills on time. Payment history is the single most important factor in your credit score. Bring any late accounts current and focus on making timely payments going forward. Consider setting up autopayments for loans and credit cards to ensure you don't miss a due date.
• Pay down credit card balances. Your credit utilization ratio, which measures how much of your credit you're using relative to your credit limits, has a major impact on your credit score. Lower is better; people with the best credit scores tend to have utilization rates in the single digits.
• Avoid using personal credit cards for business expenses. Doing so pushes your credit utilization higher, which could hurt your credit scores. It's best to use a business checking account or business credit cards for business spending.
• Keep existing credit accounts open. Closing credit cards can negatively affect your credit score by reducing your available credit and shortening your credit history.
• Limit applications for new credit. Most credit applications trigger a hard inquiry into your credit report, which can temporarily lower your credit score.
• Use Experian Boost^®ø. Experian Boost is a free feature that adds your eligible on-time utility, streaming service, cellphone, rent and insurance payments to your Experian credit report, which could increase your credit scores.

Learn more: How to Improve Your Credit Score Fast

The Bottom Line

Being self-employed doesn't affect your credit scores, but it can make lenders scrutinize your income, documentation and debt levels more carefully. Taking time to prepare your documentation and improve your credit score before applying for credit cards or loans can boost your chances of approval.

Monitoring your credit can show you whether your efforts are paying off. For a convenient way to track your progress, consider Experian's free credit monitoring service. You'll have access to your credit score and get alerts of important changes to your credit, all without taking precious time away from your business.