Are The Self Employed Less Credit Worthy?


I’ve been self employed for the majority of my working life. Whilst self employment has brought many great benefits, one well known downside to self employment is that it can make it more difficult to obtain credit, at times it can even feel as though lenders take one look at your self employed status and immediately put a big cross next to your name. Are the self employed really less credit worthy or are they just the victim of a huge generalisation?

I’ve Never Missed A Mortgage Payment

If you’re a homeowner the biggest monthly outgoing you’re likely to have is your mortgage payment. In 5 years of home ownership I can proudly say that I never missed a mortgage payment! After recently selling our home we moved into a temporary rental property and we have never missed a rental payment either. I’ve never missed a car finance payment, mobile phone payment and the list goes on. Do I sound like a credit risk to you? Yes my good credit history will improve my ability to get credit but I’m still likely to find it harder than an employed person. Does that sound fair?

The River Has Never Run Dry

I’ll admit there have been times in my self employed life when business has slowed a little but never has the river run completely dry. I’ve always managed to get by and soon things have returned to normal or I’ve found other ways to make some extra money. Can the same be said for employed people? During the past few months thousands of people have lost their jobs in the UK due to retail store and factory closures. When an employed person gets made redundant their income dries up overnight. Yes they will be entitled to some benefits but these will often not be enough to cover the mortgage and other credit payments.

Less Tax, More Benefits, More Money

In a recent post we wrote about how the self employed will often receive more money in tax credits than an employed person might. The self employed also tend to pay less tax because they are able to deduct expenses like motoring costs from their taxable earnings, this is not usually the case for the employed even though they still incur these costs. All this can lead to a self employed person actually having more disposable income in their pocket than someone who is employed.

Entrepreneurial Spirit

I believe that most people who are self employed have not just found themselves in that position, they are self employed because they have a natural drive to make money, an entrepreneurial spirit. They also have the confidence needed to get out there and achieve their financial goals. A self employed person will do whatever is required to dig themselves out of any financial hole they might find themselves in. They should also be very good at juggling short term financial strains, should being the key word here.

I’m certainly not saying that the self employed are more credit worthy than the employed or are better at managing their finances, I just think that the self employed deserve a little more credit! (Awful play on words I know)

What do you think? Are the self employed less credit worthy or are they victims of a huge generalisation?

21 Responses to Are The Self Employed Less Credit Worthy?

  1. Mochimac says:

    Generalization of course.

    I can’t even get a bloody credit card even though my score is perfect, if I don’t have a conventional job at a company.

    I remember it being a real hassle to even rent an apartment once, because I was employed under my own company and it wasn’t considered ‘proper’. I even offered to show net worth statements with bank balances but they didn’t care.

    If I say: “self-employed”, people take it to mean “unemployed”, which is not true. I have a job, it’s just not a steady one 24/7, but as a result, I have to plan my spending a lot more carefully than someone who can count on a paycheque every 2 weeks, but has $0 saved and $50K in debts.

  2. It’s a complete generalization! I struggled to get credit every time I needed it even though I have never missed a payment ever.

    In Canada, after tax time, we get a “notice of assessment” from the CRA (Canada Revenue Agency). Issuers of credit generally like to see the past 3 of them to prove that you make money on a consistent basis.

    Unfortunately for me, my deductions always push my taxable income well down into the “poor bugger” tax bracket so when I apply they generally say no and ask, “how are you not homeless?”

    Good times…

    • I know exactly what you mean, some years when I look at my net profit even I’ve wondered how I’m not homeless! Actually though I’ve been pretty comfotable. The figures don’t always tell the full story, especially not when you’re self employed.

  3. I think the concept of self-employment has undergone a huge shift towards greater financial viability/security than the Powers That Be at the banks give us credit for (pun intended). They’re behind the times and probably won’t catch up for another decade. In the UK…maybe longer, lol.

  4. Jose says:

    Personally I think that the self-employed are a better credit risk than some folks that are employed with large companies. But that’s just my opinion. Most folks I know that are self employed have a high sense of responsibility when it comes to their finances and financial obligations. They have to be or they wouldn’t be self employed for very long! One of my Step-Sons is successfully self employed as a landscaper. He’s been doing this for a number of years and has a waiting list of well to do clients! Yet he has a difficult time in even financing a new truck for his business. Some things just don’t seem fair.

  5. Do or Debt says:

    I am not completely self-employed, but it’s something I would love to do. We live in a conventional world–when applying for a home, apartment, job, credit card, people want stability. Self-employment means instability to so many people which I think is a shame. I think our economy is moving towards more creative, entrepreneurial employment, so it shouldn’t have such a stigma around it anymore.

  6. Pauline says:

    generalization. I took a job just to get a mortgage! like you, never missed a payment, but even the bank I have been with for 20 years (since I was 12!!) wouldn’t lend me unless my mother would co-sign. Self employed credit checks should looks at a little more than the numbers. It is just as easy to get fired as it is to lose a client.

  7. Matt says:

    I agree with your points in general. When I was fully self employed, I was very tight with my cash, because even with money in the bank, I didn’t know how much was coming in the following month. I’m going to go back to it, to a degree, to supplement my current income, and as a bacckup in case the job disappears. I don’t want to wind up on benefits!!

    • It’s always good to have a back up and what you say sort of proves the point, you were very financially aware because of the unstable nature of the income but the likelihood was that you would have at least some income the following month.

  8. Sure it’s a generalization but will it change, maybe, maybe not? What does one do that is self-employed and runs into these problems? Should one get a credit card before they leave their 9-5 job? When I moved to Canada I was a student and was still given a credit card ( not shocking though). Crazy how they will dish out to a student but those that are self-employed struggle.

  9. I agree with most of the posters that it’s an over generalization. But creditors have to measure risk based on generalizations. A lot of businesses fail. If you work for a big corporation they see it as a more secure job environment and thus income.
    I’d be curious to see if the size of your business would make you a better credit risk in their eyes. For example, if you’re self employed but don’t have any employees does that reduce your chances over someone with say 30 employees? How about 50?

    • Yeah it would be good if they took factors like the size of your business into consideration, I don’t think I’ve ever been asked that question on a loan application before though.

  10. AverageJoe says:

    I love this question, although it drives me crazy. As a self employed person, I always have to show tons of documentation and explain how my business works to get loans. While this makes me roll my eyes, I can see the bank’s point of view. I’ve had plenty of interactions with “self employed people” who are really deadbeats that don’t want to work or are unable to get hired. It’s tough for a bank to tell the difference between me and them (although I’m far better looking….).

    • I’m sure you are Joe 🙂 It’s nice to hear that human beings are still involved in some part of the decision making process. I haven’t dealt with underwriters for years but when I was a mortgage broker we were able to talk them around sometimes by explaining the specifics of a clients business and other commitments. I’d guess things are a lot tighter now though since the subprime crisis.

  11. Laurie says:

    Having worked 15 years in the banking and mortgage lending arena at a large bank, I can tell you that yes, there is fear in lending to the self-employed, but lots of it is b/c the AGI of many self-employed persons is super low, as the goal is to deduct as much as possible and have a low profit line, right? It’s terribly sad that credit history, etc., count for so little with a self-employed person simply because their bottom line looks low. But approvals are generally in the hands of the credit analysts, and they have to go by the guidelines given them, and mostly all that matters are the numbers (i.e. DTI ratio etc.). I’ve seen very unstable people get credit simply because they have a job with a steady income. What a shame!

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