7 ways to protect credit in a gig economy

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Being your own boss in the gig economy may sound like a great deal, but without proper planning, a freelancing lifestyle can turn into a credit disaster.

Approximately 44 million Americans took gig work in 2015, according to a 2016 survey by global workforce solutions adviser Staffing Industry Analysts. When you make a living doing freelance assignments, temporary jobs or consulting work, you get flexible hours, and may even be able to work from anywhere. The appeal is far-reaching. Nearly 40 percent of Americans said they would prefer being a gig worker to holding a full-time job.

But the freedom and flexibility can come at a cost. Maintaining a good credit score and having credit readily available can become more difficult, and a nonsteady paycheck can leave you teetering on the edge of financial ruin. If you’re thinking about joining the gig economy, take these steps to protect your finances and maintain a good credit score while pursuing a nontraditional career.

1. Save before you leap.

When you’re working small gigs, you may go weeks without work or a client may pay late, potentially leading to late bill payments and racking up debt. Erratic income is a fact of life, says Matthew Massee, who worked as a freelance translator in Salt Lake City before taking a job as an SEO specialist for personal injury law firm The Advocates.

“Some months I would be busy and easily make more money than I needed, but other months I would not earn enough to cover my basic fixed costs,” he admits.

Massee was able to withstand the financial ups and downs because he had saved enough money to pay for a year’s worth of expenses. As a result, he didn’t have to rely on credit cards to cover cash-flow inconsistencies. Plus, when he had a particularly good month as a freelancer, he would stash the extra money in an account to cover those times when business was slower.

2. Apply for loans in advance.

Many gig workers find that getting a mortgage or other loans can be more challenging without a full-time job.

When self-employed marketing strategist Gillian Perkins of Salem, Oregon, sought a home loan, the bank required two years of income history, rather than the six to 12 months required for full-time employed individuals, she says.

Perkins did eventually get her house, but she lived frugally and avoided debt to make sure her credit was as pristine as possible so she would be in a better position to get the loan.

If you know before starting gig work that you’ll need a loan in the near future, you may even want to get it before quitting your full-time job.

3. Shore up access to credit.

Credit can be an asset in the gig economy — as long as you use it wisely.

“Freelance work tends to dry up every so often, so that line of credit can be valuable until the next client comes knocking at your virtual door,” says Stephen Seifert, of Portland, Oregon, who has done SEO, web development, copywriting and editing in the gig economy.

Having credit also come in handy for emergencies such as when your computer goes on the fritz, adds Seifert.

If you’re short on available credit, consider applying for a low-interest credit card or requesting a credit line increase before quitting a job to freelance.

4. Use credit for cash flow, not debt

Though credit cards can help you to pay bills while you’re waiting for checks to arrive, try not to use them to buy things you can’t pay for within 30 days. A growing debt load will put a damper on your credit score.

“You always want to be cognizant of that debt-to-credit utilization ratio,” warns Nancy Bistritz-Balkan, director of public relations and communications for Equifax.

5. Create debt-repayment plans in advance.

Sometimes you may have to use credit cards to tide you over until business picks up. If you have multiple cards, use the one with the lowest interest rate.

In order to do the least damage to your credit score, decide how fast you can pay the debt off and stick to that plan, says Bistritz-Balkan.

6. Replenish funds with a part-time or full-time job.

If you find yourself sinking into debt, consider getting a full-time or part-time job and do your gigs on the side in order to get your finances back on track.

That’s what Saad Malik, a web developer in Austin, Texas, does.

“This allows me to have a consistent paycheck and a verifiable salary history,” Malik says. “Since I work remotely, I can switch to my freelance projects as soon as I wrap up my job’s last task for the day,” Malik says.

Once your debts are paid off and your emergency fund is replenished, go back to the gig economy full time.

7. Don’t let Uncle Sam trip you up.

Even if you work on side gigs while keeping a full-time job, you can find yourself in financial trouble if you fail to set aside money for income taxes. A hefty tax bill could leave you owing the IRS money or paying your taxes with a credit card.

An accountant can help you figure out how much you will owe and how often you should pay. Your filed tax returns also show that you’re generating income, which can pave the way for easier borrowing, says Seifert.

“I still get credit offers all the time (because) there is a paper trail of my freelancing efforts,” Seifert says.

Technology has created new and rewarding career options in the gig economy, but you must take plan ahead to make an alternative career path work to your advantage.

“Regardless of your employment situation, a poor credit score is not going to reflect well,” Bistritz-Balkan says.

See related: Tips, tools for setting up a side gig to get out of debtUnsteady income? Traditional debt-paying advice doesn’t apply

Editor’s note: This story, “7 ways to protect credit in a gig economy” originally was posted on CreditCards.com.