Categories

Advertiser Disclosure
Score Advice

How Savings Can Impact Your Credit

Erica Sandberg
By
Erica Sandberg
By

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?

Examples: 600, 700, 780, 803
300 credit score301 credit score302 credit score303 credit score304 credit score305 credit score306 credit score307 credit score308 credit score309 credit score310 credit score311 credit score312 credit score313 credit score314 credit score315 credit score316 credit score317 credit score318 credit score319 credit score320 credit score321 credit score322 credit score323 credit score324 credit score325 credit score326 credit score327 credit score328 credit score329 credit score330 credit score331 credit score332 credit score333 credit score334 credit score335 credit score336 credit score337 credit score338 credit score339 credit score340 credit score341 credit score342 credit score343 credit score344 credit score345 credit score346 credit score347 credit score348 credit score349 credit score350 credit score351 credit score352 credit score353 credit score354 credit score355 credit score356 credit score357 credit score358 credit score359 credit score360 credit score361 credit score362 credit score363 credit score364 credit score365 credit score366 credit score367 credit score368 credit score369 credit score370 credit score371 credit score372 credit score373 credit score374 credit score375 credit score376 credit score377 credit score378 credit score379 credit score380 credit score381 credit score382 credit score383 credit score384 credit score385 credit score386 credit score387 credit score388 credit score389 credit score390 credit score391 credit score392 credit score393 credit score394 credit score395 credit score396 credit score397 credit score398 credit score399 credit score400 credit score401 credit score402 credit score403 credit score404 credit score405 credit score406 credit score407 credit score408 credit score409 credit score410 credit score411 credit score412 credit score413 credit score414 credit score415 credit score416 credit score417 credit score418 credit score419 credit score420 credit score421 credit score422 credit score423 credit score424 credit score425 credit score426 credit score427 credit score428 credit score429 credit score430 credit score431 credit score432 credit score433 credit score434 credit score435 credit score436 credit score437 credit score438 credit score439 credit score440 credit score441 credit score442 credit score443 credit score444 credit score445 credit score446 credit score447 credit score448 credit score449 credit score450 credit score451 credit score452 credit score453 credit score454 credit score455 credit score456 credit score457 credit score458 credit score459 credit score460 credit score461 credit score462 credit score463 credit score464 credit score465 credit score466 credit score467 credit score468 credit score469 credit score470 credit score471 credit score472 credit score473 credit score474 credit score475 credit score476 credit score477 credit score478 credit score479 credit score480 credit score481 credit score482 credit score483 credit score484 credit score485 credit score486 credit score487 credit score488 credit score489 credit score490 credit score491 credit score492 credit score493 credit score494 credit score495 credit score496 credit score497 credit score498 credit score499 credit score500 credit score501 credit score502 credit score503 credit score504 credit score505 credit score506 credit score507 credit score508 credit score509 credit score510 credit score511 credit score512 credit score513 credit score514 credit score515 credit score516 credit score517 credit score518 credit score519 credit score520 credit score521 credit score522 credit score523 credit score524 credit score525 credit score526 credit score527 credit score528 credit score529 credit score530 credit score531 credit score532 credit score533 credit score534 credit score535 credit score536 credit score537 credit score538 credit score539 credit score540 credit score541 credit score542 credit score543 credit score544 credit score545 credit score546 credit score547 credit score548 credit score549 credit score550 credit score551 credit score552 credit score553 credit score554 credit score555 credit score556 credit score557 credit score558 credit score559 credit score560 credit score561 credit score562 credit score563 credit score564 credit score565 credit score566 credit score567 credit score568 credit score569 credit score570 credit score571 credit score572 credit score573 credit score574 credit score575 credit score576 credit score577 credit score578 credit score579 credit score
Related Articles:
Can My Spouse Ruin My Credit?
What Happens if I Return My Car to the Lender Before I Finish Paying It Off?
How Does Medical Debt Affect Your Credit Score?
Does Mortgage Prequalification Affect Your Credit Score?
When Does Bankruptcy Fall Off My Credit Report?
If I Do a Balance Transfer to Get 0% Interest, Will My Score Go Down?
Popular Articles:
Understanding Credit Scores
My Credit Score
The Difference Between VantageScore® Scores and FICO® Scores
Resources
Latest Research
Latest Reviews