Having a good credit score is important because it can open the door to affordable borrowing opportunities. Suppose you need money in a pinch and want to apply for a personal loan. The higher your credit score, the more likely you are to not only get approved for this loan, but also get it at a reasonable rate of interest. Likewise, you might see a new credit card offer on your radar that you would like to pursue. The stronger your credit score, the more likely you are to hang on to it.
The more you pay your bills on time and don’t borrow more than you can afford, the higher your credit score is likely to be. And building a healthy savings account balance is certainly a smart financial decision to make to support that. But will having a good chunk of savings impact your credit score? Here’s what you need to know.
One Email a Day Could Save You Thousands
Expert tips and tricks delivered straight to your inbox that could help save you thousands of dollars. Register now for free access to our Personal Finance Boot Camp.
By submitting your email address, you consent to our sending you money advice as well as products and services which we believe may be of interest to you. You can unsubscribe anytime. Please read our privacy statement and terms and conditions.
An indirect effect
There are a number of factors that go into calculating a credit score, but your savings account balance is not. Instead, these factors include:
- Your payment history: How on time you are with your bills
- Your credit utilization rate: How much of your available revolving credit you are using at a time
- Your credit history: How long have you had various accounts or loans in good standing?
- Your credit mix: What types of loans do you make
- Your new credit accounts: How many loans or credit cards you recently applied for
Whether or not you have money in a savings account will technically have no direct effect on your score. Part of the reason is that the credit bureaus don’t know how much savings you have; banks do not report savings account balances to credit bureaus. However, the items in the above list to do be reported.
For example, if you pay your mortgage late, your loan officer will report the late payment to the credit bureaus. The same goes for your credit card company if you don’t make your minimum payment by the time your monthly bill is due. And when you apply for a new credit card, the credit bureaus will see a serious investigation done on your file. But since the credit bureaus have no idea what your bank account balance looks like, they can’t take it into account.
Having said that, having money in savings could indirectly help increase or keep your credit score high. Having cash reserves could make you less likely to be late with a bill. And if you have a lot of savings, you might be in a better position to pay off your credit cards each month and avoid carrying a balance. The result? A lower credit usage rate, which could improve your score.
Build that savings balance
While having a lot of money in savings won’t increase your credit score, it’s a smart thing to have. In fact, a good rule of thumb is to make sure you keep enough money in savings to cover three to six months of essential living expenses. Having cash reserves could help reduce or eliminate the need to borrow money in an emergency. And the less you need to borrow, the less likely you are to fall behind on your payments.
If you want to improve your credit score, increasing your savings account balance isn’t your best bet, although it’s a good thing to do. Instead, try to pay all incoming bills on time, pay off some credit card debt to reduce your usage, and avoid applying for too many new credit cards at once. These moves could give your score a big boost no matter what your bank account looks like.
Learn more: How to increase your credit score