Credit challenges for gig economy workers and freelancers
Quick insights
- The gig economy consists of freelance or contract workers that often work short-term contracts on a project-by-project as opposed to full-time jobs with a single employer.
- Gig workers might encounter difficulties in managing their credit and accessing credit products, as their income or paychecks may not be as regular.
- Though income is not a part of your credit report, it might indirectly impact your credit score.
The gig economy is a labor market characterized by short-term contracts or freelance work—in contrast to full-time, permanent jobs. How does this type of work affect gig workers’ credit scores and access to credit? Let’s find out.
How gig work impacts workers’ credit
Workers in the gig economy work as independent contractors or freelancers, often on a project-by-project basis, rather than being employed full-time by a single employer. This often means unsteady income.
Irregular income streams can make it difficult to budget or plan financially. Planning ahead will probably be even more important in these cases in order to keep up with bills. Additionally, gig workers who are between jobs or waiting for their next paycheck may rely more heavily on credit during this period, or may struggle to pay their bills.
Challenges gig workers may face in accessing credit products
Lower credit scores and fluctuating income may present difficulties in securing approval for credit products like a mortgage or auto loan. Similarly, when applying for an apartment or financing a purchase, having a consistent income can be helpful for approval.
Gig economy workers might encounter higher interest rates or less favorable terms and conditions on credit products they are approved for. This is because lenders may perceive some borrowers as having a higher risk profile, leading to adjustments in interest rates or repayment terms.
How gig workers can try to avoid credit challenges
Since gig work can have an effect on access to credit, paying attention to credit optimization and maintenance of credit scores could be beneficial for gig workers both now and in the future when it comes to credit access and obtaining more favorable terms. Here are some ways to work toward maintaining or building good credit:
- Consider setting up a budget: Engaging in financial planning and creating a monthly budget for spending and expenses can help in preparing for bills and managing money more effectively. This approach may assist in setting aside funds for basic and expected expenses each month.
- Get on a consistent debt repayment schedule: Even with irregular income, you can plan and budget so that you can set aside the amounts you need to cover at least your minimum payments on loans and credit cards.
- Try to manage your credit utilization: The Consumer Financial Protection Bureau recommends keeping your credit utilization to below 30% of your total available credit, so sticking to this tip might help you work toward or maintain strong credit scores.
- Consider setting up automatic payments: This could help you make your minimum payments on time each month if you tend to forget when your balance is due. So making sure you pay at least the minimum amounts due each month—and ideally paying as much as you can—is a good strategy for better credit.
- Set up and maintain an emergency fund: This can help you ensure that you’ll be more likely to continue to be able to pay your bills if you’re faced with an unexpected expense, like a medical emergency or surprise car repair.
Conclusion
Though gig work might work well for some, workers may face credit access challenges due to unsteady income. Financial literacy and proactive credit management are also keys for gig workers to have the best chance at strong credit scores, access to credit and favorable credit terms.
It might also be a good idea for gig workers and everyone to explore alternative credit solutions and seek professional financial advice when needed.
