A strong credit score is crucial for securing loans and competitive interest rates. Building and maintaining a good credit score is equally important for self-employed individuals as it is for salaried professionals.
It helps you get approved for loans and credit cards at attractive offers. A good credit score can also help you qualify for better interest rates when you take a home loan. It can also make it easier to borrow for any financial emergency or other needs you may have in your life. Often salaried people maintain good credit scores but self-employed tend to ignore it.
Here are some tips on how self-employed individuals can build a solid credit score.
Maintain Financial Records
Keeping detailed and accurate financial records is essential for self-employed individuals. Maintain a clear record of your income, expenses, invoices, and tax filings. These records serve as evidence of your financial responsibility and can be used to demonstrate your creditworthiness to lenders.
Separate Personal and Business Finances
Creating a clear separation between personal and business finances is crucial. Open a separate bank account and obtain a business credit card to keep personal and business transactions distinct. This separation ensures that your personal credit score is not affected by business activities and vice versa.
Also Read: Key reasons your loan can get rejected despite high income
Register Your Business
Formalize your business by registering it as a legal entity, such as a sole proprietorship, partnership, or private limited company. This step establishes your business’s credibility and separates its credit profile from your personal credit score.
Build a Positive Payment History
Consistently making timely payments on your loans, credit cards, and other financial obligations is paramount. Payment history is a significant factor considered by credit bureaus when calculating your credit score. Ensure that all your bills and loan instalments are paid on time to build a strong credit history.
Monitor Your Credit Report
Regularly review your credit report to identify any discrepancies or errors that may negatively impact your credit score. In India, credit reports can be obtained from credit bureaus like CIBIL, Equifax, or Experian. You can also check the score online on portals like Bankbazaar.com. By monitoring your credit report, you can proactively address any inaccuracies and maintain a healthy credit profile.
Maintain a Low Credit Utilisation Ratio (CUR)
The credit utilisation ratio (CUR) is the proportion of your available credit that you utilize. Keeping this ratio low demonstrates responsible credit management. As a self-employed individual, try to maintain a credit utilisation ratio of less than 30%. For example, if your total credit limit is Rs 1,00,000, keep your outstanding balances below Rs 30,000.
Adhil Shetty, CEO, Bankbazaar, explains, “Avoid spending more than 30 per cent of your spending limit. A high credit utilization ratio (CUR) moderately hurts credit score. Always pay dues and EMIS on time. If you cannot pay the entire dues, at least pay the minimum. Avoid missing even a single payment and that will positively impact your credit score. A few years ago, Prince used to be wayward with the repayments of his dues. He took care of it later and automated his credit card payments. He instructed his bank to clear his dues before the deadline. He has never been late since then.”
Diversify Your Credit Mix
Having a diverse credit mix can positively impact your credit score. While it is essential to make timely payments on loans and credit cards, consider diversifying your credit portfolio. This could include a mix of secured loans, unsecured loans, and credit cards, demonstrating your ability to handle different types of credit responsibly.
Establish Relationships with Lenders
Developing a good relationship with lenders can be beneficial for self-employed individuals. When seeking credit, approach lenders who have experience working with self-employed individuals or offer specific loan products designed for them. Building a strong rapport with lenders can increase your chances of obtaining credit at favourable terms.
Avoid Frequent Credit Applications
Multiple credit inquiries within a short period can raise concerns for lenders and negatively impact your credit score. Avoid unnecessary credit applications and only apply for credit when genuinely required. Be selective about the credit products you apply for and focus on those that align with your needs and financial goals.
Shetty suggests, “Do not apply for too many credit cards or loans in a short span of time. Select one option thoughtfully as per your eligibility and apply for it. Each time you apply for a credit line, the lender checks your credit history. This is called a ‘hard’ check of your credit score. Each hard check mildly lowers your score. Several hard checks can substantially lower your score.”
Seek Professional Advice
Building a strong credit score as a self-employed individual requires financial discipline, management, and responsibility. By maintaining income records, separating personal and business finances, and paying your bills on time can be helpful in building a good credit score.