How to Leverage a Side Hustle Into a Better Credit Score

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How to Leverage a Side Hustle Into a Better Credit Score

How to Leverage a Side Hustle Into a Better Credit Score

How to Leverage a Side Hustle Into a Better Credit Score - PinterestRegardless of your financial goals, an extra income stream can always come in handy. If you are trying to build better credit, the funds you bring in from a side hustle could help you transform your credit score situation.

When you think of side hustles, you might only think of them as a way to make ends meet. But the truth is that these can be powerful financial tools that propel many areas of your finances forward.

Ready to use a side hustle to push your credit score in the right direction? Let’s take a closer look at how you can make that happen.

What Is a Side Hustle?

A side hustle involves an extra income stream that’s different from your primary source of income.

If you have a side hustle, you’re not alone. According to an Insuranks survey, 93% of working Americans have a side gig.

The high percentage seems like a staggering number at first glance. But it might not be too surprising when you consider the tumultuous state of the economy in 2022. Inflation is sky-high and interest rates are rising in an effort to tame the increasingly higher cost of living. Americans are living with significant uncertainty surrounding the economy. Plus, it’s getting harder to make ends meet.

Even in the best economic times, side hustles are a popular option to increase a household’s income.

Side Hustle Examples

Side hustles come in all shapes and sizes. Whether you are picking up a little bit of extra money when you need it or building out an entire business in your downtime, pursuing a side hustle can help you get your hands on the cash you need.

A few of the most popular side hustles include driving for Uber, delivering food, tutoring, becoming a transcriptionist, teaching English, freelancing, dog walking, and becoming a photographer. But there is no shortage of side hustle options out there.

Any creative way you can produce an extra income stream counts as a side hustle.

When you are considering a side hustle, the obvious downside is that it will require extra time and effort to produce this new income stream. Although a successful side hustle requires some level of effort and commitment, it’s possible to find an option that suits your time constraints and your talents.

Dog walking side hustle

Why Start a Side Hustle?

A side hustle will take time and effort. But the rewards you might reap from the side hustle could be life-changing for your financial future. Let’s take a closer look at the top reasons to start a side hustle.

Stabilize Your Finances

An extra income stream is a stabilizing factor in your finances.

Not only will the extra income help you meet financial goals, but it can also help you stay afloat if other income streams dry up. For example, you could use the extra income to pay off high-interest debt or cover unexpected costs without draining your emergency savings.

Beyond that, an extra income stream provides more diversity in your income. That’s a big deal for your financial stability. If the strange economic times have taught us anything, it’s that no job is 100% reliable. The unfortunate reality is that any of us could lose our day jobs due to market factors outside of our control.

But building a side hustle before that worst-case scenario happens is within our control. When a household has an extra income stream to lean into after losing a primary source of income, it can mitigate the financial pain involved.

Build Credit

Your credit score might seem like an innocent three-digit number. But that’s not actually the case. The three-digit number can have a major impact on your financial life and personal life.

A credit score can often make or break your ability to make major purchases. For example, if you are planning to finance a car or take out a mortgage, both require a reasonably good credit score. Without the right credit score, you might have to hold off on that purchase.

Build credit score

Even if you have a mediocre credit score, that’s not going to help you get the best interest rates on your loans. Here’s a look at how a better credit score could save you money:

  •     Buyer 1 has a higher credit score that allows them to tap into a 4% interest rate for their 30-year fixed-rate $250,000 mortgage. With that, the buyer has a monthly mortgage payment of $1,194 and pays a total of $179,674 in interest over the life of the loan.
  •     Buyer 2 is also taking out a 30-year fixed-rate mortgage with a loan amount of $250,000. But a lower credit score means they lock in a 6% interest rate. With that, the buyer has a monthly mortgage payment of $1,499 and pays $289,595 in interest over the life of the loan.

Buyer 1 is able to save $109,921 in interest payments over the life of their loan. That’s a significant amount of savings that can be put toward other financial goals. Since the right interest rate can save you thousands over the life of your loan, it’s definitely worth pursuing a better credit score.

Splurge on Your Best Life

Another reason to pursue a side hustle is the ability to treat yourself with the extra money. Since a big part of managing your finances is the ability to create a life you love, having the flexibility in your budget to splurge on your best life is exciting.

Spending side hustle income

For example, you might decide to focus on building a side hustle with the express intent of funding your wanderlust. Or you might use the funds to make small upgrades to your life along the way.

Learn New Skills

When you dive headfirst into a side hustle, there aren’t any rules about which ones you can try. You are absolutely free to try your hand at new skills. Although it can take time to learn a new skill, the promise of a paying gig might make the process a bit more enticing.

Although you can stick to side hustling, it’s possible to turn your newfound skill into an entirely new career direction. For some, this means using their new skills to command a higher income at their day job.

How to Leverage a Side Hustle Into Better Credit

It’s clear that there are plenty of reasons to build a side hustle. But if you are looking for a way to build your credit, a side hustle can come in handy. Here’s a closer look at the ways you can leverage a side hustle into a better credit score.

Use Those Extra Funds to Pay All of Your Bills On Time

Payment history matters in a big way when it comes to your credit score. Within your FICO credit score, payment history accounts for 35%. That makes a history of positive payments the most important factor in building your credit score.

A history of on-time payments gives your credit score a boost. But a series of missed or late payments can drag your credit score down severely.

For this reason, making on-time payments should be a top priority. However, that’s often a struggle if you are living on one income. The income stream acquired through a side hustle can get you the funds necessary to pay your bills on time.

With a flexible side hustle, you could choose to ramp up your efforts when you see a potential cash crunch coming down the pipeline. Or you could give your income a permanent boost to avoid missing payments.

Build an Emergency Fund

When it comes to protecting your credit score, an emergency fund is an incredibly useful tool. Essentially, an emergency fund gives you the cushion you need when unexpected expenses throw your budget out of whack.

Instead of turning to credit to cover an emergency expense, you can dip into your emergency savings. For example, if your vehicle gets a flat tire, you can cover the costs with the help of your emergency fund.

Although the right size emergency fund depends on your situation, most experts recommend building an emergency fund with three to six months’ worth of expenses. For example, let’s say that you spend $2,000 per month. You might decide to build an emergency fund of $6,000 to $12,000.

If you have a side hustle in place, you can push your earnings directly into your emergency fund until you hit the funding goal. It takes time to build up an emergency fund, but the financial peace of mind can be worth the effort.

Emergency fund savings

Keep in mind that the appropriate amount depends on your specific needs. For those with an unpredictable income stream, you might choose to build a more robust stash. But even if you have an emergency stash of $500, that can limit how often you need to reach for your credit card. 

Pay Off Debt

If you have high-interest debt, it can hurt your long-term financial plans and monthly budget.

Additionally, it’s possible for large amounts of debt to drag your credit score down. That’s because a high amount of revolving debt can impact your credit utilization ratio, which is a measure of usage on your credit card accounts.

Credit utilization is an important factor in your FICO score. It is included in the debt category, which accounts for around 30% of your score. Most experts recommend keeping your credit utilization ratio below 10%.

You can use the proceeds from your side hustle to pay down revolving debt, and ultimately lower your credit utilization ratio.

Not sure how to pay down your debt? The debt snowball and debt avalanche are two of the most popular methods. You can put the extra income from your side hustle towards the debt repayment strategy of your choice.

Here’s how each works:

  •     Debt snowball: This strategy starts by focusing on paying off your smallest debt. After you eliminate that debt, you’ll move on to the next smallest debt. Each time you eliminate a debt, you can include the erased minimum payment into your strategy. With each debt you pay off, the snowball will grow to help you tackle larger debts.
  •     Debt avalanche: This strategy starts by focusing on paying off the debt with the highest interest rate first. After you eliminate that debt, you’ll move on to the debt with the next largest interest rate. With each debt you pay off, the avalanche will grow to help you tackle larger debts.

The right method depends on your preferences. But for either option, adding in side hustle income is a game-changer.

Increase Your Credit Limits

One other way to lower your credit utilization ratio is to increase your credit limits. If you have increased your income with the help of a side hustle, it might be the perfect time to ask your credit card issuer for a higher credit limit.

Depending on the situation, they may or may not accommodate your request. But if the credit card issuer does raise your limit, that will immediately lower your credit utilization ratio. Just remember not to increase your credit card balance. Otherwise, this strategy can backfire.

Take Out a Credit-builder LoanSide hustle income

A credit-builder loan provides an opportunity to build credit and savings at the same time.

Usually, a credit-builder loan works like this:

The process starts with you taking out the loan. But you won’t receive any funds upfront. Instead, the lender deposits the loan amount into an account with your name on it. In most cases, the lender keeps your principal payment. But each time you make a payment, you are paying off the loan.

With every payment, the lender reports the activity to the credit bureaus. With consistent on-time payments, a credit-builder loan can improve your credit. But if your payments are late, that can hurt your credit score. A side hustle can give you the confidence you need to sign up for this type of loan commitment.

At the end of the loan, you’ll get access to your newfound savings. And you might see an improved credit score.

Use Credit Repair

Credit repair involves removing incorrect information from your credit report. If you have extensive incorrect information or are the victim of identity theft, the assistance of a reputable credit repair service can be worthwhile.

A side hustle can help you fund the costs of working with a credit repair service. But it’s possible to tackle this option on your own by contacting the credit bureaus. If you provide the right information, the credit bureaus must make corrections within 30 days.

The Bottom Line

Building a good credit score takes time. But harnessing the power of a side hustle can allow you to prioritize savvy credit management choices. As you continue on your credit-building journey, be patient. Your hard work will pay off in the long term.

Tradeline Supply Company, LLC
Tradeline Supply Company, LLC
Ellen writes articles that make personal finance easy and actionable.

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