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Your credit history is an integral part of your financial plan, and many decisions you make can affect your credit for better or worse. Fortunately, dipping into your savings account isn't one of them.
There can be a link between your savings and credit, however, and building a robust emergency fund can indirectly help you maintain good credit, especially during difficult financial times. Here's what you need to know.
Can a Savings Account Affect Your Credit Score?
Credit scores are calculated using information from your credit report, which provides a history of how you've managed credit cards, loans and other types of debt. Because a savings account doesn't involve debt, it's not included in your credit report and, therefore, doesn't impact your
That said, depleting your savings account or not contributing to it regularly can affect your overall financial health and have an indirect effect on your credit. If you experience a financial emergency and don't have enough money to cover the expenses, you may need to turn to credit cards and loans. If you take on more debt than you can afford to repay, missed payments and increasing balances can take a toll on your credit score.
Additionally, having a low savings balance can make it difficult to get approved for a mortgage loan, which typically requires a down payment and additional cash reserves, or an auto loan, which may require a down payment.
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How a Savings Account Can Indirectly Help Your Credit
Building and keeping money in a savings account is an important step in establishing a healthy credit history. Here are some ways a robust savings balance can contribute to good credit:
- Cover emergencies: Money in an emergency fund can enable you to pay for unanticipated expenses without needing to borrow. For example, using savings instead of a credit card to pay a deductible on your health insurance plan can keep your credit utilization rate low.
- Maintain positive payment history: If you experience a fluctuation in your income or other bills increase, having money in a savings account can give you peace of mind that you'll still be able to cover your bills without risking a late payment or needing to modify your loan.
While not directly impacting your credit, having plenty of cash in a savings account can also make you more attractive to mortgage lenders, who often expect you to have two or more months' worth of mortgage payments in savings after your down payment.
Factors That Affect Your Credit Score
Knowing what does and doesn't affect your credit score can help you make better decisions about your financial situation. It's important to check your credit score regularly to track your progress and spot potential issues before they get out of hand.
- Payment history: Making on-time payments is crucial for a good credit score. If you miss a payment by 30 days or more, it can damage your credit and remain on your credit reports for seven years.
- Amount owed: This includes how much you owe overall, but it's heavily influenced by how much you owe on your credit cards relative to your credit limits. Try to keep your balances as low as possible to avoid credit score damage.
- Length of credit history: A long history of handling credit responsibly can work in your favor. In addition to your oldest account, this factor also includes the average age of your credit accounts. Opening multiple accounts in a short period can negatively impact your length of credit history.
- New credit: Each time you apply for credit, the lender will typically run a hard inquiry on your credit reports. One inquiry typically won't affect your credit score by much, if at all. But multiple inquiries in a short period can have a compounding effect unless you're rate-shopping certain types of loans.
- Credit mix: Being able to manage different types of credit responsibly can work in your favor. As you take out different loans and credit cards over time, your credit mix will become more diverse.
Keep in mind, too, that maintaining good credit can also help you improve your savings because it provides access to lower interest rates and insurance premiums. The lower your monthly obligations, the more cash you'll have to put toward savings and other financial goals.
The Bottom Line
Saving money is crucial for a strong financial plan, and it can help you reduce your need to rely on debt for emergency expenses, large purchases and other costs over time. While taking money out of your savings account doesn't directly affect your credit score, it can have an indirect impact if your account balance gets low enough that you can't afford to weather unexpected financial storms.
As you work to build a robust savings account balance, monitor your credit to understand how your credit-related activities impact your credit score, and take steps to improve your credit so you can obtain affordable financing when you need it and enhance your ability to save.