How Savings Can Impact Your Credit

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Many financial actions have an adverse effect on your credit, but dipping into money you have in a savings account isn't among them—at least not directly.

Depleting a substantial rainy day fund may change your overall financial situation, and that can cause a ripple effect that leads to future credit problems. For that reason, maintaining a healthy savings can help protect your credit rating. Here's how savings affects your credit, and how you can make sure it's helping.

Can a Savings Account Affect Your Credit Score?

Credit scores are developed solely from the information that appears on a consumer credit report. That includes a detailed history of credit cards and loans, as well as bankruptcy filings and any unpaid accounts that are in collections. Your creditors and the courts furnish all that information to the credit reporting agencies—Experian, TransUnion and Equifax.

Savings and checking accounts are not listed on credit reports because no borrowing or debt is involved. Applying for and opening a savings account won't generate any information that shows up on your credit report, and neither will the deposits and withdrawals you make. Since this information will always be absent from your credit reports, it is not calculated into your credit scores. When you apply for credit with the intention of taking on debt, however, it will trigger an inquiry that will appear on your credit reports and be included in a score. There are two types of inquiries:

  • Soft inquiries are placed on your report when lenders review your credit to preapprove you for a loan or credit card (or when you pull your own credit reports). They are not factored into your credit scores.
  • Hard inquiries appear when a creditor uses your credit report to make a decision after you've applied for credit products. They are calculated into your scores.

If you take on debt, money in a savings account can help make sure you make every monthly payment on time and avoid carrying too much debt, which are the two most important credit scoring factors.

  • Payment history: If you don't have sufficient funds left in reserves to pay your loan and credit card bills on time, you will end up with delinquencies on your credit reports. Creditors typically notify the credit reporting agencies that you're behind once payments are 30 days past due. Since payment history is the most important credit scoring factor, late payments can have a serious negative impact.
  • Credit utilization rate: The second-most important scoring factor, credit utilization measures your credit balances against your total credit limit. Not having enough money in savings to deal with unexpected costs can affect your credit if you end up charging up your credit cards to make up the difference. Having a credit card balance at or near the card's credit limit raises your credit utilization rate, and may cause your credit scores to decline as a result.

How a Savings Account Can Indirectly Help Your Credit

Building and keeping money in a savings account is an important step in putting your credit in a healthy place. You'll want to have enough money in an account to use for a crisis, meet your current financial obligations and help your future borrowing prospects, especially obtaining a home loan.

  • Cover emergencies: Money held in an emergency account will enable you to pay for crucial but unanticipated expenses without having to borrow for them. For example, if you need to go to the hospital, you may have to pay thousands of dollars for a deductible before your health insurance kicks in. Using savings can prevent you from having to charge a large bill that would throw your credit utilization ratio off balance.
  • Insure current debt: Savings can give you peace of mind that you'll be able to cover your bills if costs go up or if expected income doesn't come through. If you have a car loan, a savings account will help you make sure those payments always show up on your credit report as on time, even if you lose your job or have other expenses pop up.
  • Appease a mortgage lender: If you're in the market for a home loan, having plenty of cash in a savings account will not just make you more appealing to a lender, it's usually essential. That money serves to lower the lender's risk level. If you can't keep up with the payments in the first few months of buying a home, you could wind up in early foreclosure. Most mortgage lenders will expect you to have at least two months' worth of mortgage payments set aside in a bank account.

In addition to socking money away for all the events, planned and unplanned, that come up in your life, familiarize yourself with what appears on a credit report. It will give you the opportunity to address any problems before they get out of control. You can access your Experian credit report for free, and there is no downside to reviewing it frequently. With a recent copy of your credit report, you can compare what you owe to the amount you have set aside. Every so often step back and calculate your net worth by adding up all of your assets and subtracting the total of all of your obligations and debt. You'll want that figure to be positive and grow over time. Savings is a major part of your overall financial well-being, which includes safeguarding your credit.

How Good Is Your Credit Score?

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