Credit is one of those things that we feel that we need to develop if we expect to succeed financially over any period of time. However, building credit can be difficult when your income is irregular. Whether you have a part-time job without a set schedule, or whether you are self-employed and you never know exactly when your next payday will be, getting credit can be difficult when your income varies.
“One of the biggest challenges of building credit on an irregular income is that your income fluctuates, making payments difficult,” says Wayne Sanford, “The Credit Guy,” with New Start Financial Corp.
Not only that, but your irregular income might make it difficult to qualify for certain loans, especially if documentation is wanted from lenders regarding your situation.
You don’t have to resign yourself to a thin credit file, however. It is possible to build credit even when you have an irregular income. Here are some of the things you can do:
Get a credit card
Even for those with irregular incomes, one of the best ways to build credit is to start with a credit card. “Keep things small,” suggests Sanford. “Get a small card and keep your balance and utilization low.”
You might be able to qualify for a credit card with a low limit. As long as you use that card responsibly, you should be able to begin building credit. Make small purchases with the card, and pay them off. All of your purchases should be part of your regular budget so that you know you have the money to pay off the balance. As you regularly make payments on time and in full, your credit situation will improve.
If you can’t get an unsecured card — even one with a low credit rating — you can consider a secured credit card. You will have to provide a security deposit as collateral for your secured credit card, but it will give you something you can start with. As with the unsecured card, it’s important to make small purchases and pay them off on time if you want to begin building your credit.
Another option, says Sanford, is to have someone add you as an “authorized user” to a card. If you have a spouse or a parent with a steady job, you can begin building some credit as an authorized user. However, being added as an authorized user isn’t the same thing as having the card. “Some points are always good points, but it’s not the same amount of points as when you have your own card,” Sanford says. He also says you have to watch out if the credit card account owner maxes out the card, since it can impact your situation.
Small personal loan
As you show that you can handle small revolving credit card accounts, and begin building your credit file, you can see if you can get a small personal loan. These installment loans can help you establish that you can handle different types of credit. If you have been using a specific bank for a long period of time, and have a good relationship with the bank, you might be able to get a small personal loan. These loans can be useful because they are usually paid in installments, with set terms. Get a small loan that you can pay off over a few months to add another layer to your credit file.
Alternative credit scoring
Another consideration is that alternative credit scoring can help you prove your ability. Steve Ely, the CEO of eCredable, says that alternative programs can help you get your foot in the door. He points out that his service looks at other payments you have made, including rent, utilities, insurance, and even gym membership. This information is verified, and you are assigned a credit rating.
There are mortgage companies, auto loan providers, and others willing to work with companies like this to provide loans to those with thin credit files. If you have an irregular income, but can show that you are reliable in your ability to pay, these programs can help you get your first loan. Then, as Ely points out, after you have begun with this first “traditional” credit account, it’s easier to build your credit file going forward.
Don’t get in over your head
The biggest pitfall of handling your credit when you have an irregular income is getting in over your head. It’s easy to think that you will be able to pay something back during a month when your income is higher. But what happens next month, when your income is lower?
When building credit on an irregular income, it’s especially important that you choose your loans carefully, and ensure that you really can repay them. You need to make sure that making your payments is a priority. Build up an emergency fund during the higher-income months so that you have a cash cushion to draw on during the lean months. Ensuring that you can meet your obligations is the best way to keep up a good credit score once you have established your credit.