Building and Getting Credit: Tips for Self-Employed Individuals


Working for yourself is a great situation to be in. In fact, it’s what many Americans dream of one day – to build their own businesses, to quit their jobs, and to wake up and “go to work” without being bossed around by anyone. This, of course, has its own advantages as well as disadvantages. The disadvantages often surface, when you are trying to get a loan, a mortgage or building credit.

The reason is that when it comes to these things, most lenders still prefer employed individuals as clients over the self-employed ones. Employed individuals have a steady paycheck and lenders like that fact, because they are sure that you have a source of income. Unlike employed individuals, a self-employed person’s income is not steady: it can rise next month and fall on the next.

However, it’s not impossible to be self-employed and have a good credit history, and qualify for loans and credit cards. You just have to know how to obtain it.

Here are some tips for self-employed individuals that can help:

Collect proof of your income from self-employment

Self-employed individuals find it hard to obtain credit and the reason for that is that it is not easy to verify your income and most likely it is inconsistent. It’s not like employed individuals who have HRs who can vouch for them and W-2 forms or wage and tax statements that can be support them.

However, if you have been self-employed for a long time or at least more than a year now, you can use your past tax returns as a proof of your annual income. Two years of tax returns would even be a lot better.

You can also supplement that with your bank statements and savings and investment accounts, if any. If you are an entrepreneur and have been good with managing your money on your own, chances are you have a good reserve of cash that you can use as collateral, for instance, when you apply for a secured credit card.

Build your savings account

If you are new to self-employment, chances are you don’t have a tax return yet to verify your income. While waiting for this tax return, you can already start building your savings account because lenders like giving credit to individuals who have a good amount of savings. That way, they will not be that anxious with the possibility of your sudden unemployment. Let’s face it, your income as a self-employed person isn’t as steady as the employed person’s income and you have to live with that fact when applying for credit and loans.

You can also use your savings as a collateral, in case you want to get credit at the soonest possible time, through a secured credit card. A secured credit card requires that you deposit some cash with your lender, and make 80% of that amount (or more depending on the lender’s policy) your credit limit. In case you fail to pay, your lender will take the money you deposited as payment.

Ask someone to co-sign your loan or credit application

Having someone who will co-sign your credit or loan application can help you obtain and built credit. But you need to know the possible repercussions if you fail to pay back a loan. Your co-signee will be the one responsible for your debt. If you have enough financial integrity and responsibility, then you can at least try asking for a family member perhaps to co-sign. If they won’t, then don’t take it against them: after all, the risk is higher on their part. Normally, we don’t advise people not to co-sign loans, even if they are family, to avoid complications and destruction of relationships that often result from financial matters.

Incorporate your business

If you are serious about being a self-employed person who runs his own business, you might want to consider incorporating your business or registering it as a limited liability company or LLC. This adds legitimacy to your business and banks might even give it more weight and count it as “assets” when you are applying for credit or loans.

Likewise, with such set up, you will be able to pay yourself just like another employee and it will appear to lenders as if you are working for just another employer. Moreover, you will be able to avail of the tax benefits that businesses have in the U.S.

Apply for a business credit

Once you have established the legitimacy of your business by incorporating it, you can start taking advantage of the perks of owning a business such as applying for a corporate checking accounts and even credit cards under the business’ name.

Of course, you would still want to separate your personal credit from your company’s business credit to avoid the possible effects that your personal or your business circumstances may have on your credit history.

If you registered your business as a sole proprietorship or general partnership, your personal credit will be tied to your business credit so you have to take care of both to avoid affecting each other negatively.

Who knows that in the long run you might need your credit histories to apply for loans to help you expand your business operations or build a new business, empowering you even more as a self-employed individual?

Take care of your own personal credit

If you have already obtained credit before you became a self-employed person, then take care of that credit so you don’t end up getting giving it up someday because of too much debt.

Always remember the rules: Pay your dues on time and don’t “use and abuse” your credit limit. These are the most important aspects of building a good credit history.

Being self-employed is a dream for many Americans. It gives them more control of their time and their income is potentially limitless. However, it remains a dream for many. If you are lucky enough to be self-employed and have a good income, then all you need to do is strengthen your financial foundation and that includes building a good credit history.