Written by If you’re self-employed with fluctuating income, you aren’t alone. One 2022 survey conducted by the talent platform Wripple found that 73% of freelancers identified inconsistent income as one of their primary challenges. Many independent workers assume that having up-and-down earnings automatically hurts their credit, or that improving their credit requires stable W-2 paychecks.
The truth is that your income doesn’t directly impact your credit score. However, it could affect your ability to keep up with your debt payments. Let’s talk about how self-employed folks can build and protect their credit — even when income rises and falls month to month.
Understand the factors that affect your credit
Many small business owners rely on their personal credit score to secure much-needed business financing. Understanding how your credit score is calculated can help you take steps to strengthen it. Below are the factors that affect your FICO score, which is used by 90% of top lenders.
- Payment history: 35%
- Amounts owed: 30%
- Length of credit history: 15%
- Credit mix: 10%
- New credit: 10%
Steps to improve your credit with fluctuating business income
Whether you have a steady income from self-employment or a 9-to-5 job, your earnings do not affect how your credit score is calculated. But it’s worth noting that inconsistent income could impact your ability to make your debt payments on time or pay off large balances — and that could negatively affect your credit score. Here are a few actionable steps business owners can take to strengthen their credit, even if their income fluctuates.
1. Keep up with your debt payments
Your payment history carries the most weight when it comes to your credit score. In fact, a single late payment could stay on your credit reports for up to seven years, according to the credit bureau Experian. For this reason, you’ll want to prioritize your debt payments. That might include small business loans, business credit cards or personal loans you’ve taken out to cover business expenses.
If you’re dealing with high interest rates or struggling to keep up with your payments due to fluctuating income, you could consider a debt consolidation loan. This can bring your outstanding debts under one new account with a new monthly payment and interest rate.
2. Reduce your debt balances
The amount you owe makes up about a third of your credit score. This is why it’s important to understand your credit utilization ratio — or the amount of available credit you’re actually using. One rule of thumb is to keep your total usage at or below 30%, according to the credit bureau Equifax. For example, if you have a credit card with a credit limit of $1,000, you wouldn’t want your balance to exceed $300.
Paying down debt can help improve your credit score, but this can be tricky if your income bounces up and down from one month to the next. At the very least, strive to make your minimum monthly payments across all your open accounts. If you have extra money in a given month, you could pay more toward whichever account has the highest interest rate, since this debt is costing you the most money. This is known as the debt avalanche method.
3. Stay on top of cash flow planning
A cash flow statement provides a summary of all the cash moving into and out of your business during a given time period. That might cover a month, a quarter or an entire fiscal year. To create a cash flow statement, you’ll need your business’s:
- Income
- Operating expenses
- Investing activities
- Financing activities
When taken together, this information can clarify your liquidity and whether you’re able to fund regular business operations. It can also provide a road map for navigating the future. From there, you can plan for seasonal income dips, irregular pay schedules and new financing applications.
4. Understand your borrowing options
In terms of financing, small business owners have options. Being intentional about how you approach it can help reduce your borrowing costs. Financing options can include:
- SBA loans
- Term loans
- Business lines of credit
- Equipment loans
- Invoice factoring
- Accounts receivable financing
- Merchant cash advances
- Commercial real estate loans
- Personal loans
- Business credit cards
But not all financing options are created equal. For example, SBA loans are known for their competitive interest rates and generous terms and borrowing limits, but you can expect a more rigorous application process. Personal loans, on the other hand, typically have looser eligibility requirements, but interest rates could be as high as 35.99% in some cases.
Consider your business goals and financial situation when deciding which borrowing option is right for you. The stronger your credit score, the more likely you’ll be to qualify for the best rates and terms. Also, remember that credit mix and new credit each make up 10% of your FICO Score. Opening a new account and paying your bill on time could help strengthen your credit in the long run.