Credit newbies have probably heard the old adage “to get credit; you need to have credit,” which is equal parts frustrating and confusing. Wouldn’t that make it impossible to get credit, especially for freelancers? 

Yes and no. You can build credit without applying for a bank credit card or a loan, but it will take you a lot longer to get over prime and above (661+). There are things you can do to fast track your way to a decent business credit score when you have limited credit, including the following.

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Is there a Low Personal or Business Credit Score Epidemic? 

Not exactly. While Millennials and Generation Z have a reputation for being “bad with money,” they’re actually more educated than previous generations. 50% of Gen Z have a credit card and prime or above credit scores, which is higher than Millennials by 11% at the same age. 

What’s more, they make up the bulk of the freelancer population, which typically has a reputation for being bad with credit. This shows that it’s 100% possible to become a freelancer and be financially independent, but it can be challenging to do so without a credit history.

In Canada and the United States, Gen Z consumers are the most credit active at 63%-66% of users in that demographic. The prevalence of credit in both demographics’ lives is the main reason for high credit card use, but unfortunately, it isn’t all sunshine and rainbows.

Why do Millennials and Gen Z have Low Credit Scores?

When Millennials and Gen Z have low credit scores, it usually isn’t their fault. On average, both demographics have three things in common:

1. A Low Number of Credit Accounts: Millennials and Gen Z are less likely to have a large number of credit accounts, credit cards, or financial products.
2. Non-Mortgage Debts: Due to skyrocketing home prices, few young people are buying up homes but are purchasing car loans, student loans and have high credit card debt.
3. High Student Loan Debt: The average student loan balance is around $40,000, which is impossible for most students to pay off in their lifetime, leading to revolving debt.

While yes, education can help anyone improve their credit score, it’s difficult to do so when young people have to take on high amounts of debt to survive.

The debt scenario becomes even more complicated when you own a business. Freelancers who choose not to separate their business and personal finances may inadvertently affect both credit scores. If they aren’t careful, they could jeopardize their lending potential in both areas.

On top of that, younger Millennials and older Gen Z’s define themselves by the economic crash of 2007-2008, followed by a sluggish recovery. With the Corona Crash imminent, the young generations have two prevailing attitudes towards money.

Either they feel debt is inconsequential and impermanent, or they fear it and hoard their money. It’s hard not to feel this way when so many 18-24-year-olds are using either their credit cards for bills and essentials or living paycheck to paycheck.

However, if Millennials and Gen Z want to improve their personal or business scores, they need to start using financial products responsibly. Otherwise, they’ll miss out on funding sources for their business, such as business credit cards, vendor credit, and equipment loans.

Debt is a Good Thing When Used Well

Building credit involves building debt; there’s no two ways around it. If you try to build your credit with starting credit cards, you can slowly build up to higher-quality financial products, like loans and mortgages. Young freelancers shouldn’t be afraid of debt because:

• Credit card rewards can give you access to free travel and money-back guarantees.
• Many credit cards have insurance coverage, like purchase protection, at no extra cost.
• Secured credit cards and low-interest cards can prevent you from overspending.
• A high credit score gives you access to low-interest rates on credit cards and loans.
• With credit, you have more negotiating power and a potential for higher limits.
• Credit gives you a better chance of approval for rentals, like apartments.
• High credit lets you avoid security deposits for cell phones and utilities. 

While it’s true you can survive on bad or no credit, it isn’t always easy and certainly not cheap. It’s more cost-effective to build your credit than having no credit at all.

Freelancers can use various accounting hacks to stay on top of their debt. Good invoicing practices, diligent record-keeping, and a budget will give you a clear picture of what you can and can’t spend in a month. Plus, you won’t pull your hair out during tax season.

How to Build a Business Credit History With Your Personal Credit

If you have zero business credit, you’ll need to improve your personal credit first. Then, you can start taking out loans and other financial products that actually improve business credit.

Become an Authorized User

The minimum age to open a credit card as the primary account holder is 18. If you’re under the age of 18, you can become an authorized user for one of your family member’s credit cards. Most companies don’t have a minimum age requirement, but adding a user costs extra.

Still, authorized users have zero liability, making it a low-risk way to build credit. Whether you’re an adult or a minor, make sure your friend or family member has good credit before signing up. If you’re an authorized user of a negligent credit card holder, it will negatively affect your credit.

Apply for a Secured Credit Card

Secured credit cards are popular with people who have a low credit score, limited credit or have been bankrupt anytime before. Most banks will instantly qualify you for a secured business or personal credit card as long as you put down a security deposit to act as collateral and as your credit limit.

A secured credit card works exactly like an unsecured card—you receive a credit limit, incur interest monthly, and earn rewards. When you have a limited credit history, a secured credit card is often the first type of financial product you can apply for as a new freelancer.

Apply for a Store Credit Card

Store credit cards often have lenient requirements and may or may not look at your credit history. If they do, it’s often a soft check to ensure your credit isn’t affected in the process. Ask them to check either your business or personal credit, whichever one is higher.

Keep in mind that store credit cards have sky-high interest rates of 25% or higher. However, if you want to build credit and you’re confident you’ll pay off your balance, store credit cards can do a lot of good for your credit history. Plus, you may get 10% off your first purchase.

Finance a Store-Purchase 

Around the holidays, most big-box retailers will give you the option to finance your in-store purchases. It’s common to see “same as cash” offers that charge no interest for a period. You may want to put financing on your business credit to add a loan-type product to your file.

As financing is a type of loan, you can use them to establish good credit. We recommend paying off your in-store purchase right away, or you could be drawing in hidden fees. After the no-interest period, you’ll typically pay an extra 20-30% on the remaining balance.