No regular income? Then how to build a credit?

Credit is one of those things that we feel that we need to develop if we expect to succeed financially over any period of time. However, building credit can be difficult when your income is irregular. Whether you have a part-time job without a set schedule, or whether you are self-employed and you never know exactly when your next payday will be, getting credit can be difficult when your income varies.

“One of the biggest challenges of building credit on an irregular income is that your income fluctuates, making payments difficult".

Not only that, but your irregular income might make it difficult to qualify for certain loans, especially if documentation is wanted from lenders regarding your situation.

You don’t have to resign yourself to a thin credit file, however. It is possible to build credit even when you have an irregular income. Here are some of the things you can do: 

Get a credit card

Even for those with irregular incomes, one of the best ways to build credit is to start with a credit card.Keep things small. Get a small card and keep your balance and utilization low.

You might be able to qualify for a credit card with a low limit. As long as you use that card responsibly, you should be able to begin building credit. Make small purchases with the card, and pay them off. All of your purchases should be part of your regular budget so that you know you have the money to pay off the balance. As you regularly make payments on time and in full, your credit situation will improve. 

If you can’t get an unsecured card — even one with a low credit rating — you can consider a secured credit card. You will have to provide a security deposit as collateral for your secured credit card, but it will give you something you can start with. As with the unsecured card, it’s important to make small purchases and pay them off on time if you want to begin building your credit.

Another option, is to have someone add you as an “authorized user” to a card. If you have a spouse or a parent with a steady job, you can begin building some credit as an authorized user. However, being added as an authorized user isn’t the same thing as having the card. Some points are always good points, but it’s not the same amount of points as when you have your own card.you have to watch out if the credit card account owner maxes out the card, since it can impact your situation.

Small personal loan

As you show that you can handle small revolving credit card accounts, and begin building your credit file, you can see if you can get a small personal loan. These installment loans can help you establish that you can handle different types of credit. If you have been using a specific bank for a long period of time, and have a good relationship with the bank, you might be able to get a small personal loan. These loans can be useful because they are usually paid in installments, with set terms. Get a small loan that you can pay off over a few months to add another layer to your credit file.

Alternative credit scoring

Another consideration is that alternative credit scoring can help you prove your ability. The  alternative programs can help you get your foot in the door. Other payments made by you like rent, utilities, insurance, and even gym membership are considered as well. This information is verified, and you are assigned a credit rating.

There are mortgage companies, auto loan providers, and others willing to work with companies like this to provide loans to those with thin credit files. If you have an irregular income, but can show that you are reliable in your ability to pay, these programs can help you get your first loan. Then, after you have begun with this first “traditional” credit account, it’s easier to build your credit file going forward.

Don’t get in over your head

The biggest pitfall of handling your credit when you have an irregular income is getting in over your head. It’s easy to think that you will be able to pay something back during a month when your income is higher. But what happens next month, when your income is lower?

When building credit on an irregular income, it’s especially important that you choose your loans carefully, and ensure that you really can repay them. You need to make sure that making your payments is a priority. Build up an emergency fund during the higher-income months so that you have a cash cushion to draw on during the lean months. Ensuring that you can meet your obligations is the best way to keep up a good credit score once you have established your credit.

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Keep business credit separate from your personal credit

For many entrepreneurs and solopreneurs, it’s common to create a business with personal financial resources.For someone with a solo business and no employees, it’s especially tempting to use  business financial resources as  personal financial resources. After all,income is  family’s income. It all goes to the same place, so it doesn’t matter if it’s a little mixed up, right?

Actually, it does matter. Keeping your business finances separate from your personal finances is important if you want to make things easier for you, and reduce trouble come tax time.

Protect your personal finances from your business setbacks

When you first start with your business, your personal assets do matter. You might need to use your own capital for startup costs, and there is a good chance that your personal credit will be used in the decision to extend your business credit for the first time.

However, as your business grows, it’s important better define the line between you and your business. There is a level of protection for your personal finances when they are separate from your business finances.If your business is structured properly, and your finances are separate, a setback for your business doesn’t have to become a setback for your personal financial situation.

A good example of the importance of keeping your personal and business finances separate comes from Robert Kiyosaki, the author of Rich Dad, Poor Dad, and the owner of multiple businesses. When one of his companies announced bankruptcy a couple of years ago, his own personal fortune was protected. Even though one of his businesses had financial issues, the fact that Kiyosaki kept things separate meant that his own individual resources weren’t impacted.

This can even apply in the event of a lawsuit. If someone sues your business, and it is properly organized and legally separate, your personal assets might be protected from the consequences of the litigation. 

The same can be applied to credit. As your business grows and develops its own credit history, you can separate your personal credit from your business. That way, if something happens to your company, and your business credit is tarnished, it won’t have as big an impact on your personal situation. The protection can work both ways; you can protect your business finances to some degree from your personal financial setbacks when you keep your business credit separate.

Consult with a knowledgeable business organization expert, attorney, or accountant as you work toward creating a separate financial profile for your business. 

Better records for your business

Another good reason to keep your business credit separate from your personal credit is for record keeping purposes. If you use your personal credit card to purchase business supplies, it’s harder to show the separation, especially if your business purchases are buried on a receipt with several personal expenses. What happens if you are asked to show documentation during a tax audit, or for some other reason? Using your business credit for business purposes and keeping it separate from your personal financial uses can help you quickly and easily track your expenses.

It can also make record-keeping easier for your own purposes. Keeping track of payroll, business purchases, and other overhead costs is much easier when you have separate accounts for business. You can quickly and easily track spending trends and plan for the future when you maintain separate accounts. 

Build business credit 

Building business credit is often difficult. Initially, you will be required to provide personal information, and you might need to a personal guarantee a business credit or loan. However, once you have your first business credit account, do what you can to build a credit profile for your business. Using your business credit card wisely, and not overdrawing your business checking account, can help boost your business credit reputation.

As your business establishes its separate credit profile, eventually it will be able to get credit without your personal guarantee.

Even if you operate as a sole proprietorship, it can make sense to at least open a business bank account and use it for income, and for business expenses. You can “pay yourself” out of your business account, and that will also create another layer of record-keeping that can serve you well at tax time. 

Even though you feel like you are your business, especially at the start, it’s vital to build those walls,. It makes things easier for you, and it can also provide your personal finances with protection against business catastrophes.

Maintain your credit profile with a good credit score. Visit www.cibilconsultants.com

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