People open up savings accounts for several reasons. Whether you’re saving for a down payment on a house, a new car, or a dream vacation, a savings account can help you achieve your financial goals. And while a savings account presents many advantages, such as earning interest on your deposits and having a secure place to store your money, you may be wondering if it can also benefit your credit score.
Lenders may look at the number before giving you a loan, and a higher credit score could help you get a lower interest rate. The truth is that your savings account does not directly impact your credit score. Still, having a healthy savings account can indirectly help you build a good credit score by helping you manage your finances responsibly.
Hard vs. Soft Credit Pulls
Lenders will review your credit before letting you borrow money. They conduct a hard or soft credit pull depending on the nature of the loan. Small loans may only require a soft credit pull. The lender reviews surface-level data in a way that does not impact your credit score.
The creditor will conduct a hard credit check (or hard credit inquiry) if you want a mortgage, auto loan, credit card, or similar financial instrument. This inquiry gives the lender more information about your credit history and hurts your credit score in the short term. The lender must request your permission before obtaining your credit report.
Do Banks Pull Your Credit When Opening a Savings Account?
When it comes to opening a savings account, many consumers wonder if banks will conduct a credit pull. While banks do conduct credit pulls for many accounts and lines of credit, the good news is that most financial institutions will not conduct a hard credit pull if you want to open a savings account. This means that your credit score will not be affected by opening a savings account.
However, it’s worth noting that some banks may conduct a soft credit pull when you apply for a savings account. A soft credit pull is a type of credit check that does not affect your credit score. Soft credit pulls are typically used to verify your identity and ensure that you meet the bank’s eligibility requirements for opening a new savings account. While a soft credit pull may show up on your credit report, you will not see a drop in your credit score.
Does a Savings Account Help Your Credit?
No, it does not because transactions don’t get reported to the major credit bureaus, so you may not get rewarded directly for making additional deposits. Many banks let you see your savings account, credit card debt, mortgage payments, and other loans on the same dashboard. Payment history makes up 35% of your credit score, and a savings account can help you stay on top of payments. In addition, making debt payments may help improve your credit utilization ratio, a vital percentage that makes up 30% of your credit score.
A savings account can strengthen categories that make up 65% of your credit score. The savings account itself will not help or hurt your credit score. However, getting into the habit of saving money and using this account to cover debt will build credit.
The Importance of Having a Savings Account
A savings account can indirectly improve your credit score by helping you stay on top of your monthly payments, but that benefit barely scratches the surface. Nevertheless, a savings account is a vital financial resource that could create more possibilities in your life. A savings account could create several advantages in your life.
Helps Build Your Wealth
A savings account is a great way to start building wealth and financial security. It provides a safe and secure place to store your money while also allowing you to earn interest on your deposits. With Federal Deposit Insurance Corporation (FDIC) insurance, you can rest assured that your money is protected up to $250,000 per account. This means that even if your bank were to fail, your money would still be safe.
By saving money over time, you can create more financial freedom and flexibility in your life. Whether you’re saving for a down payment on a house, a dream vacation, or simply a rainy day, a savings account can help you reach your financial goals. Furthermore, by separating your spending money from your savings, you can better manage your finances and avoid overspending.
Avenue to Invest
Investing is a popular path to wealth. You can keep money in your savings account, but the interest on these accounts never beats inflation. Your money will lose purchasing power each year that it stays in your savings account. Some people save money so they can invest it in the future. You can immediately put some of your money to work with stocks and crypto. Other investors save money for a property down payment.
Break Dependency on Credit
Credit cards are a great tool for making purchases and building credit, but they can also lead to debt if not used responsibly. While credit cards offer flexibility and convenience, they also come with high-interest rates and fees that can quickly add up. If you’re not careful, you can easily fall into a cycle of debt that can be difficult to escape. This is why it’s important to use credit cards responsibly and pay your bills on time.
Building a savings account can help you break free from credit card dependency and reduce your expenses. Having a savings cushion can give you the peace of mind to cover unexpected expenses and emergencies without relying on credit. By reducing your reliance on credit, you can improve your payment history and credit score, which can lead to better interest rates and loan terms in the future.
Fund for Emergencies
An emergency fund can help protect you from a rainy day or season. While you can check weather apps to see the forecast, you can’t foresee unexpected personal finances. A medical condition can require immediate attention and cause significant debt. A car accident can happen at any time and further strain your resources. Smaller emergency expenses, such as getting school supplies, can also present a challenge for many families.
Unfortunately, more than half of Americans cannot afford a $1,000 emergency expense. This stark realization demonstrates the importance of an emergency fund. You can create a separate savings account to help protect yourself from financial emergencies. You can put these funds into a high-yield savings account to earn some return on your money. The return may be less important for some than having liquid cash you can deploy for any emergency cost.
Keeps You from Spending Too Much
Designating a savings account for long-term financial goals could make it more difficult to spend money. You can put a percentage of every paycheck into your savings account for retirement. Putting money towards your long-term financial goals first gives you less money to spend. Spending less money may sting at the moment, but delayed gratification might lead to a smoother retirement.
Lenders See It as a Sign of Stability
Having a savings account with consistent deposits can be a valuable tool when it comes to securing a loan. Lenders want to see that you’re a reliable borrower who is likely to make on-time payments. By demonstrating a consistent savings pattern, you can show lenders that you have the financial discipline and stability to manage your finances responsibly.
In addition to boosting your approval odds, having a savings account can also help you get approved for a loan with better terms and interest rates. Lenders are more likely to offer favorable loan terms to borrowers who have a strong financial profile, including a healthy savings account. By demonstrating your financial responsibility and stability, you can increase your chances of getting approved for a loan with attractive terms.
Bonus Tip: Beneficial for Long-Term Financial Goals
Although this tip technically isn’t related to building credit, it’s worth keeping in mind. Designating a savings account for long-term financial goals is a smart way to prioritize your financial future. By putting a percentage of every paycheck into your savings account for retirement, you’re setting yourself up for long-term success. This approach also makes it more difficult to spend money unnecessarily, as you’ll have less disposable income available. While it may be tempting to spend more money now, delaying gratification can pay off in the long run. By prioritizing your long-term financial goals, you’re investing in your future and setting yourself up for a smoother retirement.
One of the biggest challenges of saving for retirement is staying committed to your long-term financial goals. It can be difficult to resist the temptation to spend money on immediate wants and needs, especially when you’re faced with unexpected expenses or financial emergencies. However, by making saving for retirement a priority, you’re putting yourself in a better position to achieve your long-term financial goals and improve your financial situation.
Another benefit of designating a savings account for long-term financial goals is that it can help you stay organized and focused. By having a dedicated account for your retirement savings, you can easily track your progress and see how much you’ve saved over time. This can be a powerful motivator, as it allows you to see the tangible results of your hard work and dedication.
Build Your Savings and Help Improve Your Financial Health
A savings account could help you build wealth. Each deposit increases your net worth and provides several choices. You can create multiple bank accounts to distinguish among money categories, emergency funds, spending money, vacation, and other costs.
If you’re interested in other ways to build your credit health, consider other financial products. A secured credit card or credit builder loan could help improve your financial situation and credit rating. You can also get a small personal loan if you’re able to qualify for reasonable terms. Connect with your bank or credit union to learn more about how these products can improve your financial situation or how the application process works. Some card issuers may also be able to lend a helping hand.
If you want to combine your efforts to build savings and build or improve credit simultaneously, consider a banking app like Current. They offer the Current Build Card, a secured card that allows you to access credit up to the amount you have on your spending account. This means you will always be able to pay your total amount owed, and since they report these positive payments to the credit bureaus, this will positively impact your scores. On top of this, you can also access savings pods that earn up to 4.00% APY. You can set up automatic transfers to move funds into this pod to ensure you achieve your savings goals. Current also features budgeting and other banking and financial tools to help you manage your money and an easy-to-use mobile app so you can do it from anywhere. Visit the Current’s website to open an account and build your credit or savings.
