Understanding Credit Scores in the Gig Economy

Highlights:

• The gig economy is becoming more popular. Some people work as independent contractors instead of working for a company as a full-time employee.
• If you work in the gig economy, your income may vary from one month to the next. This makes it hard to qualify for some types of credit.
• Even as a gig worker, there are ways you can build your credit. Open a secured credit card, apply for a credit-builder loan and practice good credit habits.

Over the past few years, working in the gig economy has become a lot more common. More people are doing freelance work and temporary contracts instead of traditional jobs. Freelancers and independent contractors get paid by the hour, by the unit (e.g., per word), or by the job. This means that gig work may not be as steady as traditional employment. As a result, you may find it harder to build credit.

The Importance of Credit Scores for Gig Workers

If you are a part of the gig economy, you don't get a W-2 form at the beginning of each tax season or traditional pay stubs. That's why it is vital to practice good credit behavior that helps your credit scores. Gig workers often don't earn a long-term single source of income. But a good credit score may help you qualify for loans, credit cards and lines of credit.

When you're a gig worker, you're considered self-employed. If you want to buy a home, you'll need to fill out a self-employed mortgage application. This asks for documentation related to your income and assets. You can submit profit-and-loss statements. Some lenders may not approve applicants with minimal income documentation though. A strong credit score may help you overcome this hurdle.

Challenges Faced by Gig Workers in Building Credit

In the gig economy, it's common for workers to have limited access to credit. If you have a limited credit history, you may find it harder to qualify for the credit you need. This could include unsecured credit cards, personal loans or auto loans.

Gig work also comes along with income variability. You may earn $4,000 one month and $1,500 the next month. Irregular income makes it difficult to qualify for certain types of credit. Even if you qualify, it may be tough to make your payments when you don't know how much you'll earn each month.

If you've encountered any of these challenges, consider opening a secured credit card. When you open a secured card, you deposit money. The amount you deposit usually becomes your initial credit limit. For example, if you deposit $1,000, your credit limit is likely to be $1,000.

Raising Credit Scores in the Gig Economy

If you're self-employed and need to improve your credit scores, there are several ways to do that.

• Ask a trusted family member to add you as an authorized user on one of their credit cards. As they make payments on their credit card, it helps raise the credit scores for both you and the credit card account holder.
• Apply for a credit-builder loan. With this type of loan, the lender deposits the funds into a savings account. You can't access the funds until you repay the loan. Credit-builder loans allow you to take on a small amount of debt and make regular payments on time. This shows that you're a reliable borrower. Make account payments on time and in full whenever possible.

What Gig Workers Need to Know About Credit Scoring Models

There are many different credit scoring models and credit scores may vary. Gig workers credit scores are calculated the same as everyone else. Credit scoring models look at several factors, such as:

• Payment History
• Credit Utilization
• Total Debt
• Credit History Length.

To build and maintain strong credit scores as a gig worker, focus on good credit building habits:

• Pay your bills on time every month.
• Keep your credit card balances low relative to your credit limit.
• Avoid taking on too much debt or opening too many lines of credit.
• Have a good credit mix.
• Your credit profile should include both revolving credit and installment loans.

Gig work gives you flexibility, but you may have trouble qualifying for credit if your income varies. Responsible credit behavior helps gig workers maintain good credit scores and access to credit.