Tag Archives: Job Security

Why It’s Harder to Get Credit When You’re Self-Employed

Around 6.1% of employed Americans worked for themselves in 2019, yet the ranks of the self-employed might increase among certain professions more than others. By 2026, the U.S. Bureau of Labor Statistics projects that self-employment will rise by nearly 8%. 

Some self-employed professionals experience high pay in addition to increased flexibility. Dentists, for example, are commonly self-employed, yet they earned a median annual wage of $159,200 in 2019. Conversely, appraisers and assessors of real estate, another career where self-employment is common, earned a median annual wage of $57,010 in 2019.

Despite high pay and job security in some industries, there’s one area where self-employed workers can struggle — qualifying for credit. When you work for yourself, you might have to jump through additional hoops and provide a longer work history to get approved for a mortgage, take out a car loan, or qualify for another line of credit you need.

Why Being Self-Employed Matters to Creditors

Here’s the good news: Being self-employed doesn’t directly affect your credit score. Some lenders, however, might be leery about extending credit to self-employed applicants, particularly if you’ve been self-employed for a short time. 

When applying for a mortgage or another type of loan, lenders consider the following criteria:

  • Your income
  • Debt-to-income ratio
  • Credit score
  • Assets
  • Employment status

Generally speaking, lenders will confirm your income by looking at pay stubs and tax returns you submit. They can check your credit score with the credit bureaus by placing a hard inquiry on your credit report, and can confirm your debt-to-income ratio by comparing your income to the debt you currently owe. Lenders can also check to see what assets you have, either by receiving copies of your bank statements or other proof of assets. 

The final factor — your employment status — can be more difficult for lenders to gauge if you’re self-employed, and managing multiple clients or jobs. After all, bringing in unpredictable streams of income from multiple sources is considerably different than earning a single paycheck from one employer who pays you a salary or a set hourly rate. If your income fluctuates or your self-employment income is seasonal, this might be considered less stable and slightly risky for lenders.

That said, being honest about your employment and other information when you apply for a loan will work out better for you overall. Most lenders will ask the status of your employment in your loan application; however, your self-employed status could already be listed with the credit bureaus. Either way, being dishonest on a credit application is a surefire way to make sure you’re denied.

Extra Steps to Get Approved for Self-Employed Workers

When you apply for a mortgage and you’re self-employed, you typically have to provide more proof of a reliable income source than the average person. Lenders are looking for proof of income stability, the location and nature of your work, the strength of your business, and the long-term viability of your business. 

To prove your self-employed status won’t hurt your ability to repay your loan, you’ll have to supply the following additional information: 

  • Two years of personal tax returns
  • Two years of business tax returns
  • Documentation of your self-employed status, including a client list if asked
  • Documentation of your business status, including business insurance or a business license

Applying for another line of credit, like a credit card or a car loan, is considerably less intensive than applying for a mortgage — this is true whether you’re self-employed or not. 

Most other types of credit require you to fill out a loan application that includes your personal information, your Social Security number, information on other debt you have like a housing payment, and details on your employment status. If your credit score and income is high enough, you might get approved for other types of credit without jumping through any additional hoops.

10 Ways the Self-Employed Can Get Credit

If you work for yourself and want to make sure you qualify for the credit you need, there are plenty of steps you can take to set yourself up for success. Consider making the following moves right away.

1. Know Where Your Credit Stands

You can’t work on your credit if you don’t even know where you stand. To start the process, you should absolutely check your credit score to see whether it needs work. Fortunately, there are a few ways to check your FICO credit score online and for free

2. Apply With a Cosigner

If your credit score or income are insufficient to qualify for credit on your own, you can also apply for a loan with a cosigner. With a cosigner, you get the benefit of relying on their strong credit score and positive credit history to boost your chances of approval. If you choose this option, however, keep in mind that your cosigner is jointly responsible for repaying the loan, if you default. 

3. Go Straight to Your Local Bank or Credit Union

If you have a long-standing relationship with a credit union or a local bank, it already has a general understanding of how you manage money. With this trust established, it might be willing to extend you a line of credit when other lenders won’t. 

This is especially true if you’ve had a deposit account relationship with the institution for several years at minimum. Either way, it’s always a good idea to check with your existing bank or credit union when applying for a mortgage, a car loan, or another line of credit. 

4. Lower Your Debt-to-Income Ratio

Debt-to-income (DTI) ratio is an important factor lenders consider when you apply for a mortgage or another type of loan. This factor represents the amount of debt you have compared to your income, and it’s represented as a percentage.

If you have a gross income of $6,000 per month and you have fixed expenses of $3,000 per month, for example, then your DTI ratio is 50%.

A DTI ratio that’s too high might make it difficult to qualify for a mortgage or another line of credit when you’re self-employed. For mortgage qualifications, most lenders prefer to loan money to consumers with a DTI ratio of 43% or lower. 

5. Check Your Credit Report for Errors

To keep your credit in the best shape possible, check your credit reports, regularly. You can request your credit reports from all three credit bureaus once every 12 months, for free, at AnnualCreditReport.com

If you find errors on your credit report, take steps to dispute them right away. Correcting errors on your report can give your score the noticeable boost it needs. 

6. Wait Until You’ve Built Self-Employed Income

You typically need two years of tax returns as a self-employed person to qualify for a mortgage, and you might not be able to qualify at all until you reach this threshold. For other types of credit, it can definitely help to wait until you’ve earned self-employment income for at least six months before you apply. 

7. Separate Business and Personal Funds

Keeping personal and business funds separate is helpful when filing your taxes, but it can also help you lessen your liability for certain debt. 

For example, let’s say that you have a large amount of personal debt. If your business is structured as a corporation or LLC and you need a business loan, separating your business funds from your personal funds might make your loan application look more favorable to lenders.

As a separate issue, start building your business credit score, which is separate from your personal credit score, early on. Setting up business bank accounts and signing up for a business credit card can help you manage both buckets of your money, separately. 

8. Grow Your Savings Fund

Having more liquid assets is a good sign from a lender’s perspective, so strive to build up your savings account and your investments. For example, open a high-yield savings account and save three to six months of expenses as an emergency fund. 

You can also open a brokerage account and start investing on a regular basis. Either strategy will help you build up your assets, which shows lenders you have a better chance of repaying your loan despite an irregular income. 

9. Provide a Larger Down Payment

Some lenders have tightened up mortgage qualification requirements, and some are even requiring a 20% down payment for home loans. You’ll also have a better chance to secure an auto loan with the best rates and terms with more money down, especially for new cars that depreciate rapidly.

Aim for 20% down on a home or a car that you’re buying. As a bonus, having a 20% down payment for your home purchase helps you avoid paying private mortgage insurance.

10. Get a Secured Loan or Credit Card

Don’t forget the steps you can take to build credit now, if your credit profile is thin or you’ve made mistakes in the past. One way to do this is applying for a secured credit card or a secured loan, both of which require collateral for you to get started.

The point of a secured credit card or loan is getting the chance to build your credit score and prove your creditworthiness as a self-employed worker, when you can’t get approved for unsecured credit. After making sufficient on-time payments toward the secured card or loan, your credit score will increase, you can upgrade to an unsecured alternative and get your deposit or collateral back.

The Bottom Line

If you’re self-employed and worried that your work status will hurt your chances at qualifying for credit, you shouldn’t be. Instead, focus your time and energy on creating a reliable self-employment income stream and building your credit score.

Once your business is established and you’ve been self-employed for several years, your work status won’t matter as heavily. Keep your income high, your DTI low, and a positive credit record, you’ll have a better chance of getting approved for credit. 

The post Why It’s Harder to Get Credit When You’re Self-Employed appeared first on Good Financial Cents®.

Source: goodfinancialcents.com

8 Career Tips to Help You Crush Your Goals in 2021

Good riddance, 2020.

After one of the worst years of our lifetime, the ritual of setting New Year’s resolutions has taken on new meaning — especially when it comes to our financial lives. The pandemic erased the jobs of millions of Americans and docked the incomes of millions more.

But now is a time for forward thinking.

Instead of lamenting the past, we can apply a few lessons learned to make 2021 a much better year. (The bar is pretty low. We can only go up from here, right?)

1. Revisit Your Career Goals for 2020

Dig up your New Year’s resolutions from last year. If you didn’t commit them to paper (or a Google Doc) try to think back to the before times. You may have had some grandiose goal of landing your dream job or scoring a hefty raise.

Chances are you did not tick all those boxes. But as you sift through that list, look for any goals that can be salvaged. Then carry those goals over to 2021. Some tweaking may be required.

If nothing else, let this exercise provide a little comic relief. (How naive we were last New Year!)

2. Consider a Bridge Job

Bridge jobs can be a tool in helping you achieve a greater goal — even as you make a lateral but temporary career move.

Let’s say you had an epiphany and realized that your dream job is a creative director at a fancy advertising agency. You may not land the director position right off the bat. But you could gun for that junior graphic artist opening then work your way up.

Or, maybe you were in the hospitality industry and are still recovering from a layoff. You may not find the same job immediately. Instead, you could strategically use a seasonal job to fill the income void while you launch a concerted job hunt for a better match for your skills.

Here’s more on how bridge jobs can help you reach your career goals.

3. Optimize Your Resume

If you’re applying to a large company, chances are you’re doing it online and your resume is going to be reviewed by applicant tracking software (ATS) before any human sees it.

Basically, the software is a screener that scans your resume to see if you’re a good match for the position. It does that by matching skills and credentials mentioned in the job listing with your resume.

But if you didn’t optimize your resume properly, the ATS may not see you as a qualified candidate — even if you have the background the company is looking for.

Pro Tip

The trick is to make sure your resume uses similar phrases and wording from the job listing, aka resume keywords.

The format you choose for your resume is just as important. In certain cases, the standard chronological list of employment may not be the best choice. If you’re looking to change job fields or apply to a position for which you lack experience, career experts recommend using what’s called a functional resume: one that highlights your transferable skills and how those are a fit for the job you seek.

4. Jazz Up Your LinkedIn Profile

LinkedIn can be a powerful, free tool for job seekers. If you signed up but let your profile languish without posting a headshot or work history, carve out a little time to jazz it up. Because that time can really pay off.

You can spruce up your LinkedIn profile in as little as 30 minutes. Here’s what you should do:

  • Customize your URL.
  • Choose a professional photo.
  • Craft a killer headline.
  • Write a recruiter-drawing summary.
  • Ask for recommendations from colleagues.

The professional social media site is especially useful when you’re researching a new employer. You can search for people who have worked for the company (past and present) to get a sense of its work culture. (Don’t be afraid to ask directly!) And if you’re invited to an interview, you can easily look up your interviewer(s).

During the pandemic, LinkedIn implemented a photo banner that you can add to your profile picture to let employers know you’re actively looking for work. For a more discreet approach, in the setting menu, you can toggle an “open to work” feature that only recruiters can see.

And that’s just scratching the surface.

5. Prepare for Virtual Job Recruitment

Virtual recruitment is the new normal. Even before the pandemic, online job fairs and interviews were steadily gaining popularity.

By attending fairs and interviewing virtually, you can connect with people you may never have otherwise had the opportunity to. It may sound a bit daunting at first, but we’ve all been collectively thrown into this remote environment at the same time. Hiring managers and recruiters may be working out the technical kinks themselves and are more likely to be forgiving.

Having strong remote-interviewing skills can be an easy way to set yourself apart. This quick interview advice can go a long way:

  • Adjust your lighting. If possible, include multiple light sources from different angles to eliminate any harsh shadows.
  • If you wear makeup, consider applying a little extra because it doesn’t show well on camera.
  • Position your web cam at eye level. (No one wants to see up your nose.) Stack a few books under your laptop if needed.
  • Have an interesting prop behind you. A bookshelf, plant or painting could work wonders.

6. Brush Up on Your Interviewing Skills

Even if you feel like a rockstar interviewer, you probably don’t know for sure unless you’ve watched a video of yourself during an interview (unlikely) or conducted a mock interview with a friend or family member (also doubtful). Having someone else critique your body language and provide honest feedback will help you address quirks you didn’t even know you had.

It’s good to make your mock interview experience as close to the real thing as possible. During the pandemic, that likely means a video call. Have the gracious soul you’ve convinced to assist you make note of technical aspects like lighting as well as the substantive things like how you answer questions and react under pressure.

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If you’re one of the millions of Americans who have slipped into long-term unemployment during the pandemic, that adds another layer to your interview you should prepare for: questions about your employment gap. You will likely be asked about your time out of work directly and possibly even in an accusatory manner. Have an honest, straightforward response ready and highlight any professional developments or new skills you’ve honed in the meantime.

7. Get Comfortable Negotiating

Your 2021 career goals aren’t likely to happen without a bit of legwork. Many career-related goals (raises, new jobs, better hours) boil down to one major thing: negotiation.

For most folks, negotiating can stir up some uncomfortable feelings. Those feelings are the first (and probably biggest) roadblock to getting what you want.

Once you’ve committed yourself to having those difficult conversations, do your homework. If your negotiation is income-related, research salary ranges for your position. Peg yourself on that scale based on your location, skills and experience.

Mentally set three numbers: a reserve point (the lowest number you’ll accept), a target point (the salary you want) and an anchor point (the first number to come up during the conversation). Use these numbers to create a game plan.

No matter the type of negotiation, it’s important to practice (maybe that same friend from your mock interview is available?) and to keep your composure. Stay calm, respectful and flexible and you’ll be ticking off those goals in no time.

8. Use a Side Gig Intentionally

Gig work can be a blessing or a curse depending on how you put it to use.

Blessing: extra income to help you meet a personal goal, like paying off debt or honing new skills that further your career. Curse: a seemingly never-ending grind and critical means of income from which there is no escape.

Sounds a little dramatic, sure. But the pandemic has really underscored this dichotomy. As millions of jobs have vanished, gig work — especially app-based services — has become a safety net. The work is fairly straightforward, entry-level and can be started in days.

Left uncheck, though, the gig you planned to do on Saturday evenings can slowly creep into Sundays. Then Mondays. Before you know it, most of your income is coming from a smattering of gig apps that have no real job security or benefits.

To avoid this scenario, set attainable financial or career goals, meet those goals and then get out. In other words, your side gig needs an exit plan.

Adam Hardy is a staff writer at The Penny Hoarder. He covers the gig economy, remote work and other unique ways to make money. Read his ​latest articles here, or say hi on Twitter @hardyjournalism.

This was originally published on The Penny Hoarder, which helps millions of readers worldwide earn and save money by sharing unique job opportunities, personal stories, freebies and more. The Inc. 5000 ranked The Penny Hoarder as the fastest-growing private media company in the U.S. in 2017.

Source: thepennyhoarder.com