Freelancers and Credit Cards – Making a Tough Relationship Work
I’ve been a freelancer full-time for over 6 years and a credit card holder for about 8 years. I love being able to set my own hours and being able to only work when I want to. While others face a hassling commute and complain about their daily grind, I enjoy a work situation I love.
The one downside, of course, is that with freelancing, finances can really be up and down. It can make credit cards more than a little tricky. By making most of the mistakes it is possible to make, I have found that freelancers should be careful with the plastic and keep the following in mind:
1. Look for other types of credit. As a freelancer, waiting for that check can sometimes be hard. Not all clients are prompt in paying you, and that can create problems. Clients may be tardy, but your bills still have an annoying tendency to be due at the same time each month –- whether you are getting paid or not. Credit can be one way to make sure that you can fill any financial gaps, but just because you need credit does not mean that credit cards are the best option. Lines of credit can be more flexible and far less expensive, for example. If there are times when you know you will need to borrow to pay your bills, be sure to select the best credit option.
2. Build up savings. Having credit can be a great option, but it should not be your first choice when you run into trouble. Setting aside 10% of every pay into a savings account is surprisingly painless and allows you to build up a nest egg. Check with your bank –- most financial institutions have online savings accounts featuring minimal fees and high rates. This sort of account allows you to keep your credit card current, too. If you have a scant month, you can always dip into your savings so that you can pay off your credit card on time.
3. Get a smaller limit on your credit cards. It sounds contradictory, but a smaller limit means less temptation. With your savings and your alternative form of credit, lower credit card limits will not hurt you and will protect you against any impulse purchases.
4. Consider registering yourself as a business. Like me, most freelancers consider themselves as individuals, not as businesses. However, registering your services as a business offers many financial benefits. One of them is that you can establish a business credit card. These can have excellent rates and many benefits.
5. Protect your FICO scores as carefully as you guard your reputation. Every freelancer knows that he or she is only as good as his or her reputation. I spend a lot of time working hard to ensure that my clients are happy. When clients are happy with my work, they recommend me to others. If they are ever unhappy, I know that bad news travels fast. FICO scores work the same way –- when they stay healthy, your financial life sails pretty smoothly. As a freelancer, I know that there is almost no safety net. I might need a bigger loan some day and that means my FICO score has to stay squeaky clean. Since a freelancer’s life can be feast or famine, it’s important to plan ahead so that you can keep all bills current, all the time.
Jonathan Leane is on a mission to teach banks a lesson. While not running his Personal Finance Blog, MasterYourCard.com, he enjoys Rockclimbing, Hiking, and speaking about himself in the third person.
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Talk about a well-timed post. I’ve never liked credit cards, really, and I’m not too good with self-control so I’ve always seen them as quite dangerous. I’m sure plenty of the creative types out there have the same issues. However, as I start my business up, I’m finding that I’m bumping up against some obstacles by not having the trusty ol’ credit card. I may just have to get one in the very near future, but hopefully if I can put some of your tips to good use, I’ll manage to tame the credit beast.
Thanks!
Great advice, Jonathan. I definitely agree with you, the one thing I’d say is that higher credit limits (as long as you’re not using that credit) help your credit score…right? I’m looking to someone with more financial knowledge than me to chime in here.
This may come off a little too Dave Ramsey-ish, but if I were writing this article I would have written it from the stance that all credit cards are bad and that your FICO score is just a fancy term for a ‘debt score.’ All it does is prove that you can go in debt and stay that way. The only positive that it might show is that you pay your bills on time.
When you think about it, who really wants more debt? Figure out other means of making money if you get in a bind. Better yet, set up a plan so that you don’t get in a bind. This would include savings, investing and building some sort of emergency fall-back fund for those times when clients are slow to pay.
A zero FICO score would be ideal for me and my family. Paying cash or writing a check is a much better option all the way around.
If you need a card in your wallet, carry a debit card.
@Christian – love the comment about ‘debt score’ lol.
@John – I don’t think higher limits helps your credit score, in fact it could lower it. Established available credit lowers the amounts you qualify for on your debt ratio – i.e. getting a loan is harder when your banker knows you can go out the next day and cash advance $20k. Tends to make them nervous. Payment history, debt ratio and stability are really the key factors. Also, if you get a bunch of credit in one year it counts against you, it’s called ‘escalating credit’.
Credit cards can be a bad thing, however they are almost necessary for doing business online. Having at least one that you use for online purposes makes things go much smoother. Imagine trying to buy hosting or domain names without, although granted PayPal is making that easier all the time. Also, when you’re working from home, ordering things online for your business makes so much sense and saves so much time it’s worth it – especially for things like books, etc. It’s also helpful if you plan to do any travelling, credit cards can offer many advantages such as insurance, car rentals, etc.
The other major debt we have is our housing; we all have to live somewhere. It doesn’t take a financial genius to figure out that paying a mortgage is better than paying rent, and even if you’re renting you’re simply paying your landlord’s mortgage while getting no benefit.
Debt is something we all have, whether or not you have any loans or credit cards at all. That’s what your income taxes are for – your debt incurred for you by your government. In our society, there’s very few ways you can get around being debt free. Responsible use is the key.
There is nothing wrong with being Ramsey-ish. I’m debt free and love it. I can work on the projects I like instead of taking every crappy job that walks through the door just to pay off CHASE. How about saving up an emergency fund of 3 to 6 months of expenses, cutting up your credit cards and living (and working) with the peace of mind of knowing that nobody has their hands on your money except for you. It’s a freedom that can’t be put into words.
Just be responsible, don’t buy what you can’t afford, and you’ll be fine.
Problem solved.
Now if only people weren’t so irresponsible.
This is irresponsible advice. Only saving 10% of your earnings is nowhere close to enough to be able to pay taxes. And I don’t think that using credit cards to pay your bills is OK either. If you do not have enough money to pay your bills you are not running a profitable business and need to stop and reevaluate what you’re doing.
@Hollis, there are many times when being a renter is much better for one’s finances than being a homeowner. Take, for example, many of the housing markets in the United States. For the average earner, they are simply unaffordable.
Historically, the median house price in any given market is three times the median income. Or, if the house is to be used as a rental, it should sell for 100-120 times the monthly rent. There are very few American housing markets where you’ll find house prices that reflect these figures.
Until more air comes out of the housing bubble, it’s best to rent and save your money for a down payment. Despite what the real estate agents say, now is NOT a good time to buy. House prices are falling, and they will continue to do so for quite some time.
Excellent post. Oh the credit cards — love / hate. They can save you, but also can drown you.
I’d love to hear more on the subject of the financial implications of registering as a business vs. being a sole proprietor.
I’ve heard contradictory information on this topic. Are there tax benefits of being, say, an LLC (US) vs. being a sole proprietor? If you’ve read “Rich Dad, Poor Dad,” Robert Kiyosaki would say there is, but another author I’ve read disagreed.
If there could be an ernest discussion between the two types of business types, I’d love it. Maybe two blog posts: one from someone who’s going at it alone but is registered as a business, and another who’s a solo freelancer who’s just a sole proprietor?
A lot of information on FICO scores can be found at myFICO.com; it is a good read if you are planning on getting a big loan, so that you can increase your fico score and qualify for lower interest rates; before you get that loan.
I do not really agree with the lowering of credit limits in this post, because it would narrow your debt to credit ratio…It is better to have a high credit limit and utilize 30% of it, then it is to have a low credit limit and utilize 80% of it. When you lower your credit limit with a creditor, does the creditor publish the credit limit they set in your credit report, or the lower credit limit you set? That is something I am unclear about. If they publish the credit limit they set it to, it may be a good idea.
I do agree with using different types of credit though. Credit cards usually have really bad terms for cash advances…such as high interest rate, compounded daily with no grace period…and every payment you make towards a cash advance actually goes towards purchases first! It is pretty sick…
This is a great article. I agree with both sides of argument; credit cards are a blessing and a curse. like so many other things it all comes down to self-discipline. Even though the credit card companies say I can afford a Mac Air… I know I can’t, so I don’t get one.
I’m a pretty steady saver, given half a chance, but I’ve had trouble finding a savings account with a decent rate that allows for sporadic savings. As you say, finances can be up and down – so some months, you’re not going to make that minimum savings deposit, and other months, you could double it. I’m happy with my bank in many respects, but I’m going to have to find better savings options.
Currently I’m borrowing cash from a retirement account at like $6K at a time. I have 60 days to put it back without penalty and so far I’ve been able to do that.