Side hustles have become increasingly popular as a way to supplement income, pay off debts, and improve financial stability. However, many people engaging in gig work may not realize the impact it can have on their credit score. The fluctuating nature of gig work can make it challenging for lenders to assess creditworthiness, as traditional methods rely on stable, predictable incomes.
According to Scott Bialek, co-founder of Hurst Lending, lenders often calculate qualifying income based on the lowest-earning months, which may not accurately reflect a gig worker’s actual income. This can result in difficulties qualifying for credit when needed. To overcome this challenge, gig workers may need to provide additional documentation, such as a year-to-date profit and loss statement signed by a CPA, to demonstrate their true income.
Garth Sheriff, president of Sheriff Consulting, explains that the underwriting process is increasingly influenced by artificial intelligence, which may pose challenges for gig workers. These individuals are often required to provide extensive documentation during the application process, and AI bias towards traditional employees can make it harder for gig workers to secure credit.
To improve approval odds, gig workers can consider working with online lenders that focus on cash flow analysis rather than traditional income verification methods. Connecting bank accounts directly can also speed up the approval process. Additionally, auditing tax returns from the past two years to ensure a healthy net income may increase chances of approval.
While gig workers may be tempted to maximize deductions to lower tax bills, claiming fewer deductions could boost adjusted gross income and meet debt-to-income requirements for lenders. It’s essential to strike a balance between minimizing taxes and securing future loans.
In case of a credit application denial, requesting an adverse action notice from the lender can help identify potential errors in credit reports or income verification. Working with a CPA or financial advisor to create a formal business case document can also strengthen credit applications.
Ultimately, gig workers should plan ahead for major purchases that require financing by reevaluating tax deduction strategies and seeking professional advice. By taking proactive steps to improve creditworthiness, gig workers can position themselves as competitive applicants for future credit needs.
