A freelancing lifestyle can create credit nightmares without proper planning
When you make a living doing freelance assignments, temporary jobs or consulting work, you get flexible hours, and may even be able to work from anywhere. The appeal is far-reaching. Nearly 40 percent of Americans said they would prefer being a gig worker to holding a full-time job, according to a 2016 survey by global workforce solutions adviser Staffing Industry Analysts.
But the freedom and flexibility can come at a cost. Maintaining a good credit score and having credit readily available can become more difficult, and a nonsteady paycheck can leave you teetering on the edge of financial ruin. If you’re thinking about joining the gig economy, be proactive to protect your finances and maintain a good credit score while pursuing a nontraditional career.
The difference between freelancing and gig work
Distinctions are sometimes made between traditional freelancing and gig work. “Some define people in the gig economy as those who are getting work from digital platforms,” says Marion McGovern, author of “Thriving in the Gig Economy: How to Capitalize and Compete in the New World.”
Uber drivers who find their fares through an app and graphic designers who find clients via a site such as Fiverr would be examples of gig workers. Freelancers, on the other hand, are non-permanent workers who find clients through other methods, such as marketing and networking.
Whether you consider yourself a gig worker or a freelancer, you might experience financial uncertainty at some point. In fact, 63 percent of freelancers in 2017 dipped into savings at least once per month compared to only 20 percent of non-freelancers. Income predictability, savings and debt are all challenges that freelancers and gig workers face. However, good credit can help smooth the way for a successful career in the gig economy.
Ways to ease the financial transition
If you are planning to join the gig economy, there are steps you can take to start your new career journey on firm financial footing.
Save before you leap
When working small gigs, you may go weeks without work or a client may pay late, potentially leading to late bill payments and debt. Erratic income is a fact of life, says Matthew Massee, who worked as a freelance translator in Salt Lake City before taking a job as an SEO specialist for personal injury law firm The Advocates.
“Some months I would be busy and easily make more money than I needed, but other months I would not earn enough to cover my basic fixed costs,” he admits.
Massee was able to withstand the financial ups and downs because he had saved enough money to pay for a year’s worth of expenses. As a result, he wasn’t as affected by cash-flow inconsistencies. Plus, when he had a particularly good month as a freelancer, he would stash the extra money in an account to cover those times when business was slower.
Apply for loans in advance
Many gig workers find that getting a mortgage or other loans can be more challenging without a full-time job.
When self-employed marketing strategist Gillian Perkins of Salem, Oregon, sought a home loan, the bank required two years of income history, rather than the six to 12 months required for full-time employed individuals, she says.
Perkins did eventually get her house, but she lived frugally and avoided debt to make sure her credit was as pristine as possible so she would be in a better position to get the loan.
If you know before starting gig work that you’ll need a loan in the near future, you may even want to get it before quitting your full-time job.
Shore up access to credit
Credit can be an asset in the gig economy – as long as you use it wisely.
“Freelance work tends to dry up every so often, so that line of credit can be valuable until the next client comes knocking at your virtual door,” says Stephen Seifert, of Portland, Oregon, who has done SEO, web development, copywriting and editing in the gig economy.
Having credit also comes in handy for emergencies, such as when your computer goes on the fritz, adds Seifert.
If you’re short on available credit, consider applying for a low-interest credit card or requesting a credit line increase before quitting a job to freelance. Look for the best credit cards that offer rewards, cash-back or other perks you’ll be able to benefit from.
Protecting credit in the gig economy
Once you have left your full-time job, you will no longer have a steady paycheck. That means it’s more important than ever you master your budgeting and put some safeguards in place to protect your credit.
- Know and cut expenses. One of the benefits of gig work is that there is no limit to how much you can make. Determine how much you need for monthly expenses so you know the minimum you need to bring in each month. Look for ways to reduce costs so you have less pressure while your income grows.
- Use credit cards for business perks and to avoid late bill payments. Credit cards can help you to pay bills on time while waiting for checks to arrive. On-time payments are one of the biggest factors to maintaining a good credit score.
- Use a credit card with a low interest rate if you expect to carry a balance for more than 30 days. Use a credit card that offers rewards that can benefit your business for purchases that you expect to pay off quickly.
One thing to keep in mind is that a growing debt load may put a damper on your credit score. The more debt you have relative to your available credit, the more damaging to your credit score. “You always want to be cognizant of that debt-to-credit utilization ratio,” warns Nancy Bistritz-Balkan, director of public relations and communications for Equifax.
- Create debt-repayment plans in advance. If you know you will be juggling debt, be proactive about it. Decide how fast you can pay the debt off and stick to that plan, says Bistritz-Balkan. You’ll save money by tackling high-interest credit cards first or taking advantage of 0 percent balance transfer offers. When you have an exceptional month, put more money toward your debt payments.
- Replenish funds with more gigs or a part-time or full-time job. Since freelancing and gig work are often unpredictable, sometimes you may find yourself in need of steadier cash. Consider getting a full-time or part-time job and do your gigs on the side in order to get your finances back on track.
That’s what Saad Malik, a web developer in Austin, Texas, does.
“This allows me to have a consistent paycheck and a verifiable salary history,” Malik says. “Since I work remotely, I can switch to my freelance projects as soon as I wrap up my job’s last task for the day,” Malik says.
You can also benefit from doing gigs on multiple platforms. For example, you can sell products on Etsy.com while driving for Uber.
Handling the tax man in the gig economy
Without a full-time job, you won’t have an employer withholding money to pay your taxes. Here’s how to make sure Uncle Sam doesn’t trip you up.
Set aside a portion of earnings.
Even if you work on side gigs while keeping a full-time job, you can find yourself in financial trouble if you fail to set aside money for income taxes. A hefty tax bill could leave you owing the IRS money or paying your taxes with a credit card.
An accountant can help you figure out how much you will owe and how often you should pay. Your filed tax returns also show that you’re generating income, which can pave the way for easier borrowing, says Seifert.
“I still get credit offers all the time [because] there is a paper trail of my freelancing efforts,” Seifert says.
Use one credit card for business expenses.
As a freelancer or gig worker, you may be able to deduct business expenses when you file your taxes. One way to keep track of what you buy for your business is to use one credit card for all business purchases. You’ll have a record of business purchases while keeping business and personal expenses separate.
Find an accountant familiar with the gig economy.
Someone who is accustomed to working with freelancers knows all of the tax laws you can benefit from. For example, a provision in the 2018 tax overhaul lets gig workers and other freelancers deduct 20 percent of their revenue from their taxable income.
Unique challenges for freelancers and gig workers
A freelance lifestyle poses different challenges for different professions. Here are some tips for some popular career paths in the gig economy.
Advice for freelance writers and designers
Freelancers such as writers and designers not only have to worry about sporadic income, but they sometimes must deal with clients who go out of business or simply refuse to pay. That can hamper cashflow and lead to late bill payments, hurting your credit score.
To minimize risk, have clients sign a contract that lays out full terms of payment and pay a deposit before you start. Also, be proactive about asking for money, McGovern says. “If you’re running your own business, you might have to tell your client, \u2018You’re late paying, so please pay up.’” Finally, identify laws that could help. For example, New York recently passed the Freelancing Isn’t Free Act, which protects freelancers from clients who don’t honor their contracts.
Advice for rideshare gig workers
If you get gigs from a driving or delivery platform such as Uber or Lyft, your driving can work to your advantage. When tax time comes around, you may be able to deduct the mileage used for your gigs. Track your mileage with apps such as SherpaShare Ultimate Rideshare Driver Assistant and Mile IQ.
To save money on fuel, sign up for a credit card with gas rewards. Though rideshare companies offer insurance coverage, check with your auto insurance provider to see if you need more. Many insurance companies offer policies geared particularly toward rideshare drivers.
Advice for online sellers
If you make a living selling goods online through a service like Etsy, you may incur costs for inventory as you’re waiting for buyers. Pay attention to your sales cycle and grow your inventory slowly to make sure you don’t overstock for customer demand.
To minimize cashflow issues, use a 0-percent promotional or low-interest credit card to buy supplies or inventory and pay it off once your items sell.
Advice for freelance developers/programmers
There are many opportunities for those who make a living offering services in the technology space. Offer clients the option to pay using credit cards to speed up payments and minimize cashflow problems.
Programmers and developers who have a problem with late-paying clients might also consider invoice factoring services, which let you sell your outstanding invoices for fast cash. For example, if you have $10,000 in outstanding invoices but need money quickly, the factoring service would provide the money upfront for a percentage of the balance and then collect when your customers pay.
Technology has created new and rewarding career options in the gig economy, but you must plan ahead to make an alternative career path work to your advantage.
“Regardless of your employment situation, a poor credit score is not going to reflect well,” Bistritz-Balkan says.