How to Build a Strong Credit Profile as a Self-employed Individual

1. Start with Credit Early

New-to-credit self-employed individuals should start their credit journey as soon as possible. While credit cards are among the most common ways how people step into credit, it may be difficult for the self-employed to get approved for an unsecured credit card. Some of the alternatives are:

• FD-backed credit cards
• Consumer durable loans
• Buy Now Pay Later (BNPL) Products
• Short-term Personal Loans

These options are good for self-employed consumers as they carry much lesser risk of rejection and help build credit easily.

2. Build a Consistent Repayment Record

Credit bureaus give the highest weightage to repayment records. This means if you consistently pay all your dues timely and in full, it will have a positive impact on your credit score. On the other hand, even one missed credit card bill or EMI can have negative impact on your credit score. You can set auto-pay for these payments to ensure you never miss the due date.

3. Keep Business and Personal Expenses Separate

For business owners, it is common for business and personal expenses to overlap. This makes the assessment of your income and expenses difficult. Hence, it is advised to keep these two incomes and expenses separate. Open a dedicated bank account for business and route all your business spends through that account. You can also get a business credit card to cover for your day-to-day business spends.

4. Keep Your Credit Utilization Low

Credit Utilization Ratio (CUR) shows the ratio of your total available credit that you are using. A low CUR is good for your credit score whereas a consistently high CUR may lead to a drop in your score. This is because high usage indicates more reliance on credit and presents you as a credit-hungry borrower. CUR is even more important for self-employed individuals as income variability makes lenders look at credit usage more closely. Hence, always try to maintain a low CUR.

5. File Your ITR without fail

Income Tax Returns (ITR) is one of the key documents that lenders assess when processing a loan application from a self-employed consumer. It acts as a substitute for salary slip so you should not miss even a single year, even if you do not fall in the income tax bracket.

It is also important to build a strong income trail by routing all client payments through your business account instead of taking cash.

6. Avoid Frequent Loan or Card Applications

Applying for too many loans or credit cards within a short span leads to multiple hard enquiries which can lead to a significant drop in your credit score. Too many applications also show credit-hungriness, which further makes lenders cautious.

7. Maintain a Healthy Credit Mix

Lenders and credit bureaus want to see that you have the ability to manage different types of credit products. Hence, consumers who have different secured and unsecured loans, credit cards, etc. and have been managing them well, usually have good credit score. While a good credit mix is important, you should not take a new loan just to improve your credit mix.

In addition to these steps, self-employed individuals should also look beyond credit and show overall financial stability through regular cash inflow.

Here are some of the most common mistakes that self-employed individuals make that could hurt their credit score:

• Missing bill payments or EMIs
• Exhausting the entire credit limit
• Not filing ITR every year
• Applying for multiple loans within a short span
• Mixing business and personal finances