According to the latest figures by the Office of National Statistics, there are now almost 5 million self-employed people in the UK. And while this option is ideal if you want to be your own boss, it also means you’re in charge of your own finances. If you’re not careful with your professional finances, you may find that your credit score ends up being negatively affected as a result, which can damage your ability to apply for a loan or mortgage later down the line.
Being self-employed means you’ll need to think carefully about how you’re both saving and spending money. But if your credit score has already been affected and you want to improve it, or even if you want to prevent it from being negatively affected, there are little things you can do to keep it as high as possible.
Explaining your business credit score
If you’re self-employed, that means you’re the sole proprietor of your business. This means that you run a one-person business that isn’t registered as a legal entity, such as a corporation or partnership. This makes you fully responsible for any and all finances, including any potential debt that you may fall into on a business level.
We understand that handling a business credit score can be difficult, but you may find that you need a loan from time to time to help you out financially, especially if you’re just starting out. You may also want to get hold of a business credit card or open a business account in order to keep your personal and professional finances as separate as possible. However, this all depends on how good your credit score actually is.
Improving your business credit score
As a business proprietor, you will want to make sure your credit score is as high as possible. This means that if you ever need to apply for a loan or mortgage, any bank will see that you’re reliable when it comes to making repayments. Lenders will then be able to offer you a loan at a preferable rate, giving you a less expensive loan if you ever need it.
Improving your business credit score doesn’t need to be difficult, though—you just need to take appropriate steps to keep on top of all your finances.
Get a credit card and keep it open
It may sound counterintuitive, but getting a credit card specifically for your professional outgoings is recommended. If you don’t already have one, apply for a credit card for your business, but limit your credit usage on it. This will stop you from spending what you cannot afford, which makes repayments easier. It also allows you to spread the cost of your small expenses, while protecting your purchases through Section 75.
If you already have a business credit card that you’re struggling to repay, you might think it makes sense to close it once you’ve cleared your debt. However, this can actually hurt your credit score. If you’ve had that line of credit open for a while, you can build on your credit score by repaying your debt and then keeping it clear. As Money Expert explains, you should have a few credit cards open, but not max them out. If you spread payments responsibly across all of your credit cards, the site notes that you will “appear as someone who uses credit regularly and well”, thereby making you more likely to be granted any future loans.
However, if you have multiple, maxed-out credit cards open in your name, you could look desperate to a lender, ruining your chances of a loan. On the other hand, if you don’t use your credit cards, or only have a single line of credit open, you’re not giving yourself the chance to build a solid credit history.
Secure finance on big-ticket items
While credit cards are good for covering small expenses, if you’re looking to buy a big-ticket item, it’s probably a good idea to look into financing options for purchasing it. This is ideal for things like vehicles and large equipment, which you may well need in your line of work. However, much like a credit card, this can be difficult to secure if you’re self-employed and you may well need to provide more documents in comparison to if you were employed by a company. Financing experts CarFinance+ recommend providing as much information as possible when making an application, in order to secure finance if you’re self-employed. This includes proof of your business income over the previous six months, evidence of any existing debts, and formal accounts dating back two years.
That said. this can be difficult if you’re just starting off in your career, and don’t actually have the documents to provide. In this case, you’ll need to provide as much information as possible regarding your professional financial situation. You can also disclose evidence of your income before you registered as self-employed in order to prove that you will be able to make the repayments as necessary. In some cases, you’ll also need to provide proof of address, as lenders tend to prefer applicants who have lived at the same property for at least a year.
Financing, or personal loans, allow you to spread out the cost of your item over an agreed period of time, in regular, manageable payments. If you were to buy the item on a credit card, however, you would need to pay off a larger sum in a shorter amount of time, and owe interest on any outstanding payments.
Keep your credit utilisation ratio low
This is simply the ratio between the credit you spend and the money you pay back. Keeping your credit utilisation low requires making multiple payments every month in order to help clear your debt. This is made even easier by simply keeping your credit costs low, and only spending what you can afford to repay as quickly as possible. Any credit you have will update regularly, which can change your score over the course of just a few weeks. This means that making regular payments to clear any debt can drastically improve your credit score in the space of about a month.
You can easily work out your own credit utilisation score by dividing your credit balance by your credit limit. Then, simply multiply that number by 100 to find your credit utilisation as a percentage. A general rule to follow is to keep your credit utilisation below 30%. Paying off your debt as frequently as possible also indicates that you’re in a good financial position to make regular payments throughout the month. This suggests to lenders that you’re a reliable borrower, therefore making you an attractive candidate for any loans you may apply for.