How to keep your credit score stable as a freelancer
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Among the many fears freelancers battle with on the regular is the issue of cash flow. It can be very difficult for us to keep payments coming in on time to pay our bills. After all, a client might not think much of sending in a payment a few days late, but landlords don’t treat payment deadlines with such a cavalier attitude.
Individually, the occasional late payment is stressful enough, but enough overdue bills will start to affect your credit. As a freelancer, that can seriously impact your ability to expand and to become a business. Poor credit can prevent you from securing loans and even housing.
Start Considering Credit in Your Daily Life
The first step in improving your credit is to start thinking in terms of your credit score when you make financial decisions and when you conduct business.
The first step is awareness. You need to understand how your daily activities aggregate into your credit score. This isn’t just about paying bills on time. There are a number of factors that go into a credit score, such as your ratio of debt to income and the amount you put on credit.
There are too many factors to go into here, so take a moment to read through this credit repair guide from Fiscal Tiger to get an overview of what credit is, how to find out whether yours is good or bad, and how to begin thinking about your credit as a freelance professional.
Review Your Expenses, Debt, and Income
The best way to repair credit is consistency over time. That’s why credit can be such an issue for freelancers, especially when just starting out, before you’ve worked out a good schedule, have regular clients, and have plans for how to handle turnover.
It’s important to start keeping a monthly tally of your expenses. You can do this by looking at your statements and with a good old pen and paper, but if you’re looking for something to interact with on a daily basis, expense tracking apps can really help set and keep on targets.
Speaking of targets, it’s time to start finding places to cut. Here’s the critical thing: Cut out subscriptions, services, and anything that goes on a credit card first. Improving your credit isn’t achieved just by saving money. It’s about reducing the monthly automatic load on your finances, things that go right onto cards with payment dates. Credit is a fantastic tool, but if you over-use it, the interest payments can kill your finances as well as your credit.
Try and work out a chart of what percentages of your income go to which expenses. For example, the most common advice is to spend around 30 percent of your income on housing. If you’re overspending in one area, it might be time to downsize in order to take the pressure off.
Protect Your Revenue to Keep Credit Stable
Here are some proactive steps you can take while you’re doing business to protect your income. This is a vital component of keeping your credit healthy and staying agile as a freelancer and business owner.
A good deal of protecting your income can be done in advance of starting work for a client. Putting clear payment terms into your contract will go a long way toward avoiding disputes and delays when it comes time for clients to pay.
If you’re very concerned about a new client or have had a series of bad experiences, it might be worth your while to consider deposits or milestone payments, which will help protect your income and ensure that you’re guaranteed some money with which to pay down pesky bills with due dates.
It’s also a good idea to have some money set aside for legal fees. This is more a question of preventative measures than actually taking someone to court. Small claims court is relatively easy to file for and you don’t need representation, but a letter from a lawyer can solve problems before things get that unpleasant. A lawyer can whip up a threatening letter in half an hour to an hour. It’s an expensive hour and may only be worth it for high-value contracts, as you could be looking at a $200-300 expense, but one letter can often solve a lot of problems if it comes from a lawyer. If you’re in New York, however, going straight to small claims or a labor complaint could be very beneficial due to the local Freelance Isn’t Free act.
Some people recommend putting late fees into contracts, but I’ve yet to decide if they are worth it or if they begin a relationship in too much of an adversarial way. They may also shoot you in the foot by setting the impression that a late payment is expected and acceptable to you, when what you’re trying to do is protect your income.
Ben Steele is a writer, theat(re) professional, and nonprofit administrator. He was born in England, spent his teen and early 20s in Canada, and now lives in America. Please excuse his occasionally confused voice and the odd recalcitrant u after an o.