People open up savings accounts for several reasons. A savings account presents many advantages, but do those advantages extend to 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.
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 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?
Banks conduct credit pulls for many accounts and lines of credit. So it’s natural for consumers to wonder if the practice extends to savings accounts. Most financial institutions will not conduct a hard credit pull if you want to open a savings account. The bank may do a soft credit pull, but this will not affect 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 o your 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 lets you easily store and access money. The FDIC insures up to $250,000 per savings account, allowing people to accumulate money safely. Making and keeping more money could help create more choices in your life. You can save for retirement and have a nice nest egg to help with living expenses.
Some consumers create multiple bank accounts to separate spending money from money meant for savings.
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 could give you flexibility in your purchases. You can buy goods and services even if you don’t have enough money in your wallet. This spending could improve your credit score if you make on-time payments and have not used all your available credit. However, debt can build up and become difficult to manage if you lose track of it. As a result, you may fall behind on payments and possibly face higher interest rates.
A savings account makes you less dependent on credit. You can still use credit cards to help build credit, but a savings account provides you with resources to quickly cover your debt when you need it. Breaking dependency on credit can reduce your expenses and improve your payment history.
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
A savings account with consistent deposits can help you secure a loan. Lenders look for reliable applicants who won’t fall behind on loan payments. A savings account can improve your application and help you get approved for a loan.
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.
