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Does Being Self-Employed Affect Your Credit?

Through April 20, 2021, Experian, TransUnion and Equifax will offer all U.S. consumers free weekly credit reports through AnnualCreditReport.com to help you protect your financial health during the sudden and unprecedented hardship caused by COVID-19.

Being self-employed has its pros (setting your own hours) and cons (unpredictable income), but does it hurt your credit score?

You might be wondering that if you're considering striking out on your own, or if you're already self-employed and contemplating a purchase that requires financing, such as a car or home. The good news: Self-employment does not directly affect your credit score. The not-so-good news: Some lenders may be hesitant to extend credit to self-employed applicants. Keep reading to learn why—and what you can do about it.

Does Self-Employment Show Up on Your Credit Report?

Your credit report includes information about your credit accounts, bankruptcies and recent inquiries into your credit report. It also includes some personal information, such as your name, Social Security number, current and past addresses, and current and past employers.

Your employment history (as well as any self-employment history) may show up on your credit report based on information you provided when applying for credit in the past. When you apply for a loan, credit card or other form of credit, you'll typically be asked to provide information about your job, including the name of your employer, your income and how long you've worked there. This information helps a lender decide if you're financially stable enough to be creditworthy.

Your lenders may pass the employment information you listed on your application along to credit bureaus, but aren't required to do so. As a result, if you've ever filled out a credit application and listed yourself as self-employed, that information may be reflected on your credit report. Whether you're employed or self-employed, your employment history is not factored into your credit score.

Does Self-Employment Make It More Difficult to Get Credit?

Your credit history is just one of the "five Cs" that lenders look at when determining your eligibility for credit. The other four are capital (any assets you can use to repay a loan), capacity (your monthly income), collateral (any assets you can use to secure the loan) and conditions (such as the amount and terms of the loan or the current state of the economy).

Your income itself is not a factor in your credit score. However, lenders do consider your debt-to-income ratio, which compares the total amount you owe every month to your total income. An acceptable debt-to-income ratio depends on the lender's criteria, the type of loan you're seeking and a variety of other factors. In general, if your ratio is 50% or above, lenders may feel you already have too much debt and deny your credit application.

Some lenders may view self-employed borrowers as riskier than those who work for someone else. There are several reasons for this. If you're relatively new to self-employment, you may not have a long track record of successfully generating income. Even if you've been self-employed for quite a while, you might make a lot of sales one month and fewer the next, or your customers may take a long time to pay their invoices. As a result of these natural ups and downs, your income is likely to be less stable than that of an employee receiving a regular paycheck.

Depending on the nature of your business, you may also have taken on a lot of debt to get it up and running. If you've invested a lot of your own money in your business, you might be left with few liquid assets you can tap to pay off your loans in a crunch. Both can work against you when applying for more debt—but there are steps you can take to improve your situation.

How to Get a Loan When Self-Employed

If you're self-employed and having trouble getting a loan, you have a few options that may help.

Check your credit report and scores so you know where you stand and can assess what types of loans you may qualify for. You can research loans and credit card offers online to find the ones suited to your credit score. Don't try for loans or credit card offers that require a credit score above yours.

Are you looking for a loan? Try approaching a credit union instead of a bank or asking someone with good credit to cosign the loan. You might also boost your odds of success by offering to secure the loan with collateral. If you're applying for a car loan or mortgage, save up to make a bigger down payment. A bigger down payment will reduce the cost you have to borrow and may make it easier to get approved.

Are you trying to get a credit card? See if someone you trust who has good credit will add you as an authorized user on their credit card. If you're struggling to get a loan for your business, consider other financing options such as getting a business credit card, invoice financing or microloans.

If you're self-employed and planning to apply for credit in the near future, it may be a good idea to try to improve your credit score first. You can help to increase your credit score by paying your bills on time, paying down your debt so that your credit utilization ratio is under 30%, keeping existing credit accounts open even if you aren't using them, and limiting your applications for new credit. You can also use Experian Boost , a free service that adds your on-time utility and cellphone bill payments to your Experian credit report, potentially increasing your credit scores.

Self-Employment and Your Credit

In and of itself, self-employment doesn't help or hurt your credit scores. In fact, your self-employed status may not show up on your credit history at all. Still, lenders may view self-employed borrowers with some caution. Thankfully, there are steps you can take to alleviate their concerns. If you run into problems getting credit, checking your credit score and taking steps to improve it can help. With a little effort, you could enjoy all the freedoms self-employment has to offer and still be able to get credit when you need it.

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