There are plenty of attractions to being self-employed. The convenience and freedom, for parents there’s the flexibility of working around the children and for many, the potential of greater earning power.
However, working outside the framework of an employer also means giving up the safety net of a guaranteed salary and benefits. For this reason, being self-employed can complicate your chances of being granted credit.
But don’t despair, there are measures which you can take to help resolve this.
Self-employment and your credit rating: The facts
Being self-employed shouldn’t actually alter the way in which your credit score itself is calculated. Perhaps the major factor in your credit score is your previous credit history. So whether you’re self-employed or not, late payments on a credit card or even something as innocuous as a late mobile phone bill can count against you.
On the other hand, if you have shown yourself to be financially reliable, your credit score will benefit. You can find out your credit score by receiving a free copy of your credit report from one of the UK’s registered agencies such as Experian Credit Expert .
As someone who is self-employed, the problem with a poor credit score, is that it can restrict your chances of a big loan or a mortgage, more so than if you were a regular, salaried employee.
Sadly, the days of self-certification mortgages are long gone, when all that was required was to declare your income. The property crash saw an end to that. So a mortgage lender will usually make a decision based on both your salary and credit score.
Proving your earnings when you’re self-employed can be difficult and sometimes prohibitive. Adding a poor credit score into the bargain is not a good starting point.
How to improve a poor credit score
If you find yourself with a poor credit score, there are several steps you can take to improve it.
- For a start, make sure that you are on the electoral roll. Credit agencies become suspicious when there is no permanent record of address and the electoral roll is the central repository for this.
- If you don’t have a credit card, then get one. Just make sure that you repay on time. It will be good proof of your financial responsibility.
- If your business is registered or incorporated, then open a responsible business credit account. Again, it will markedly boost your credit credentials.
Self-employment and applying for a mortgage
The other challenge if you’re self-employed and applying for a mortgage, is how to prove your earnings. Without a PAYE slip, lenders can be reluctant to agree to a loan. One way around this is to incorporate your business, even if you regard yourself as a freelancer. It will enable you to pay yourself a salary with a real salary slip, which should be enough to convince the bank or building society.
If this is not possible, then there are other things that you can do.
- Lenders usually want to see 2-3 years’ worth of accounts, so it’s well worth making sure that your accounts are up to date. Consider using a reputable, registered accountant for this purpose.
- Similarly, make sure that you keep all tax returns, bank statements and any other proof of verifiable income.
- If you file a paper self-assessment and send it to HMRC by post, they will send you a form called the SA302. It shows your total income and tax due, and is usually taken into account by lenders. Note that this form cannot be downloaded from the HMRC Website if you file your self-assessment online, although you can print off your tax calculation yourself. Just bear in mind that the online version will not show the number SA302. Please see the HMRC Website for further details.
- Lastly, if you have significant profits from your business, although it may make sense to plough much of it back into the company, it’s worth noting that lenders prefer to see savings and equity, so take this into consideration or seek professional advice from your accountant.