Maurie Backman| The Motley Fool
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Having a good credit score is important because it can open the door to affordable borrowing opportunities. Say you need money in a pinch and want to apply for a personal loan. The higher your credit score is, the more likely you'll be to not only get approved for that loan, but to get it at a reasonable interest rate. Similarly, you might see a new credit card offer hit your radar that you'd like to pursue. The stronger your credit score is, the more likely you'll be to snag it.
The more consistent you are with paying your bills on time and not borrowing more than you can afford, the higher your credit score is likely to be. And building up a healthy savings account balance is certainly a smart financial move to make to support that. But will having a decent chunk of savings impact your credit score? Here's what you need to know.
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An indirect effect
A number of factors go into calculating a credit score, but your savings account balance isn't one of them. Instead, these factors include:
- Your payment history: How timely you are with your bills
- Yourcredit utilization ratio: How much of your available revolving credit you're using at once
- Your credit history: How long you've had various accounts or loans in good standing
- Your credit mix: What types of borrowing you do
- Your new credit accounts: How many loans or credit cards you've recently applied for
Whether or not you have money in a savings account technically won't have a direct effect on your score. Part of the reason is that the credit reporting bureaus don't know how much savings you have; banks don't report savings account balances to the credit bureaus. However, the items in the list above do get reported.
As an example, if you're late paying your mortgage, your loan servicer will report that late payment to the credit bureaus. The same is true 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 hard inquiry made on your record. But since the credit bureaus have no idea what your bank account balance looks like, they can't take it into consideration.
That said, having money in savings could indirectly help boost your credit score or keep it at a strong level. Having cash reserves could make it so you're less likely to be late with a bill. And if you have a lot of savings, you may be in a better position to pay off your credit cards every month and avoid carrying a balance. The result? A lower credit utilization ratio, which could help your score.
Build that savings balance
Even though having a sizable amount of cash in savings won't cause your credit score to rise, 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 when emergencies strike. And the less you need to borrow, the less likely you'll be to fall behind on payments.
If you want to improve your credit score, boosting your savings account balance isn't your best bet – even though that's a good thing to do. Instead, try to pay all incoming bills on time, pay down some credit card debt to lower your utilization, and avoid applying for too many new credit cards at once. These moves could give your score a nice boost – regardless of what your bank account looks like.
Learn more:How to Increase Your Credit Score
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