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Side hustle: Why your credit score, credit card use matter

Running a successful side gig requires stellar credit; here’s how to achieve it and maintain it

Summary

A high credit score can be instrumental to make your side hustle profitable, giving you access to funding and expanding opportunities. These tips will help you maintain stellar credit and avoid costly mistakes.

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Thanks to the popularity of the gig economy, it seems like everyone has a side hustle these days. Whether it’s freelancing, selling on Etsy or driving an Uber, a side gig can be a great way to earn extra money for debt repayment or savings.

Running a profitable side hustle can boost your income, but it isn’t all about the money. Part of being a successful side hustler is keeping your credit in good shape.side

Here’s why good credit is important if you have a side gig, along with tips on maintaining a high score.

See related: The ultimate guide to protecting credit in a freelance and gig economy

You may need a loan to grow your hustle

A loan can help you crank up your side hustle into a full-scale business if bootstrapping isn’t an option.

Locking down a business loan requires a good credit score, says James Garvey, CEO of Self Lender, a company that offers credit builder loans.

“While cash is important, credit is where the true power lies if you’re looking to expand,” says Garvey. “Your credit score can determine what loans you’re eligible for, your interest rates and other factors that could either save you – or cost you – big time.”

Latasha Peterson, founder of personal finance blog ArtsandBudgets.com, hasn’t applied for a business loan yet but understands how weighty credit scores are for loan approval.

“Not having a good credit score can actually hurt your business and cause the decision not to go in your favor,” she says.

Peterson and her husband are working hard to grow their side hustles, while keeping their credit scores in the upper-700s range in case they need financing down the line.

Good credit can enhance your credit card options

A credit card is another way to scale your side hustle and there are distinct benefits to having good credit in that scenario.

“Having a great credit score has helped me be eligible for a lower interest rate on my credit card, which has been a huge plus while running my business,” says Peterson.

She currently uses the Bank of America® Cash Rewards credit card to cover side hustle spending. The card offers 3 percent cash back on a category of choice, including gas, online shopping, dining and travel (up to $2,500 in combined choice category/grocery store/wholesale club quarterly purchases).

Peterson says those “are all great areas for my business to use the rewards card in.”

A higher credit score can also help you qualify for upper tier business rewards cards. That means better card perks and more miles, points or cash back you can potentially earn on business expenses for your side hustle.

Jeff Moriarty, founder of marketing agency JMoriarty Marketing, is in the process of turning his side hustle into a full-time business. He leveraged his 780 credit score to get approved for the Chase Ink Business Preferred Credit Card.

“With my business, I’ll be traveling to meet clients quite a bit, so the more I can save on flights and hotels, the better,” says Moriarty.

  • He earns three points per dollar on travel, shipping, internet, cable, phone services and advertising purchases on up to $150,000 in combined purchases annually with the card.
  • Aside from travel, Moriarty is also using the card to earn one point per dollar on things he needs to get the business up and running, such as computer hardware and office furniture.
  • He’s holding rewards in reserve until he needs them for business travel.

Your credit score still matters when your hustle stays small

You can benefit from good credit even if you don’t have plans to grow your side hustle right now.

“Having a side hustle could raise a person’s available credit limit by raising their income,” says Garvey.

Your credit card company may ask you to update your annual income from time to time. Reporting a higher income may lead to a credit limit increase.

A higher credit limit could improve your credit utilization ratio, which in turn, could improve your credit score. That matters if you plan to borrow money down the line.

Credit utilization – the amount you have borrowed compared to your credit limits – is the second most important factor in credit scoring calculations, after making on-time payments.

“Even if you’re only doing your side hustle to say, earn enough money to get a car, an improved credit score could help save money on a car loan,” says Garvey, if you’re able to get a lower interest rate.

Likewise, you could score better interest rates on personal loans, mortgage loans or student loan refinancing.

See related: What is a good credit score?

Follow the dos and don’ts of building good credit

Amid staying busy with your side hustle, make time to work on improving your credit score.

Mike Pearson, founder of personal finance site CreditTakeoff.com, runs a six-figure side hustle and has an 820 credit score to boot. He offers some simple tips for maintaining a good credit score as a side hustler:

  • Know what goes into calculating your score. “If you don’t understand the factors that make up your creditscore – payment history, credit utilization, types of credit, number of inquiries, and credit age – you’ll never be able to build up a good score or maintain one,” says Pearson.
  • Never miss a payment. Payment history makes up 35 percent of your FICO credit score. Paying on time every month is instrumental in raising your score.
  • Keep your credit utilization as low as possible, or at least below 30 percent. “Lenders want to see that when you have a line of credit, you’re responsible with it,” says Pearson, which means maintaining a decent gap between your balance and overall credit limit.

Credit mistakes to avoid while running a side hustle

If you’re using credit to cover side hustle expenses, avoid overcomplicating things with too many cards.

“In general, don’t open more credit cards than you feel confident you can responsibly manage,” says Garvey.

Sticking to just one or two cards, for instance, can make it easier to keep track of spending and your due dates.

“The biggest thing I can tell those looking to take their side hustles full-time is to pay off the card each month and never forget to pay them,” says Moriarty.

Running up a large balance can hurt your profitability if you’re taking money out of cash flow to repay the debt. Missing a payment can negatively affect your credit score “when you need it as high as possible,” says Moriarty.

Limiting applications for new credit cards can also preserve your score.

“Every time you apply for that new travel card to get those airline miles, it results in a hard inquiry,” says Pearson, “which can lower your score.”

Check your credit report regularly. Look for errors or inaccuracies that could be dragging your score down and dispute them with the appropriate credit bureau.

Lastly, consider padding your cash reserves before trying to grow your side hustle into a full-fledged business.

Upgrading your emergency fund can help you get through the inevitable lean times and avoid potentially putting your credit score at risk by running up credit card debt or falling behind on payments.

“Do what you can to prepare for a few months of low or no income ahead of time,” says Garvey.

What’s up next?

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Published: May 9, 2019

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Credit Card Rate Report Updated: December 4th, 2019
Business
15.09%
Airline
16.88%
Cash Back
17.38%
Reward
17.04%
Student
18.58%

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