Can a Bank Account Help Improve Your Credit Score?
Written by
Melanie Grafil, AI Editor
Edited by
Melanie Grafil
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When you think about your money health, it’s really important to know how different types of bank accounts your credit score. A question people often have is: “Does putting money in a savings account help your credit score?” The simple answer is no, but there’s more to it.
While a savings account on its own doesn’t directly impact your credit score, it can still play a role in your overall finances and indirectly affect your creditworthiness. Here’s how.
See: 3 Things You Must Do When Your Savings Reach $50,000
About Credit Scores
First, here’s what you should know about credit scores and how they work. Your credit score is a numerical representation of your creditworthiness, based on your credit history. Lenders use it to evaluate how likely you are to repay borrowed money. Key factors affecting your credit score include your payment history, the amounts owed, length of credit history, new credit and types of credit used.
How Savings Accounts Work
A savings account is a type of bank account where you can store money securely. Unlike credit cards or loans, which are forms of borrowed money, a savings account represents your own funds. Therefore, your account activity doesn’t appear on your credit report, nor does it impact your credit score directly.
However, having a savings account can be beneficial in indirect ways:
- Emergency fund: A well-funded savings account can act as a safety net for unforeseen expenses. This prevents the need to take on high-interest debt in emergencies, which can harm your credit score if not managed properly.
- Show that you’re financially stable: While your savings account balance isn’t reported to credit bureaus, lenders may consider your overall financial stability when making lending decisions. A healthy savings account can demonstrate that you are financially responsible, a factor that might influence lenders, especially for significant loans like mortgages.
- Secured credit cards: If you’re struggling to build or repair credit, a secured credit card can be a useful tool. These require a deposit, which often comes from your savings. By using and paying off a secured credit card responsibly, you can improve your credit score.
Can Bank Accounts Help You Build Credit?
Understanding if bank accounts can help you build credit is simpler than it seems.
The Simple Truth About Bank Accounts and Credit Scores
- Savings and checking accounts: These are basic bank accounts where you keep your money. What you do with these accounts – like putting money in or taking it out – doesn’t get reported to the credit bureaus. So, having a savings or checking account doesn’t directly help your credit score grow.
- Using bank accounts smartly: There’s a way your bank account can help, but it’s a bit roundabout. If you have a savings account, you can use the money in it to get something called a secured credit card. This is a kind of credit card where the money you have saved acts as a safety net for the bank. When you make purchases using this card and pay your bill on time, it shows good money habits, and thus, is reported to credit bureaus. This is how you can use a bank account to help build your credit score.
In short, while your regular bank account activities don’t directly boost your credit score, they can be a stepping stone to getting tools like secured credit cards that do help with your credit. It’s all about using what you have in a smart way to build a good credit history.
Building Credit the Right Way
So, if a savings account doesn’t directly build credit, what does? Here are a few proven strategies:
- Timely bill payments: Paying your bills on time, especially loans and credit cards, is crucial. Payment history is the most significant factor in your credit score.
- Credit utilization: This refers to how much of your available credit you’re using. Keeping your credit utilization low (generally below 30%) is seen as responsible credit management.
- Diverse credit types: A mix of different types of credit–such as installment loans, credit cards, and retail accounts–can positively impact your credit score, showing that you can manage various credit types responsibly.
- Length of credit history: The longer your credit history, the better. It gives more data about your borrowing behavior.
- New credit: Opening several new credit accounts in a short period can be risky. It’s better to build your credit slowly and steadily.
Other Considerations
You should make it a habit to regularly check your credit report for errors, which can negatively impact your credit score. You’re entitled to a free credit report from each of the three major credit bureaus once a year. Reviewing these reports can help you identify and correct any inaccuracies.
Final Take
While a savings account doesn’t directly build your credit score, it’s a vital component of a healthy financial profile. It can contribute to overall financial stability, which is crucial for maintaining good credit health.
Remember, building a good credit score is a marathon, not a sprint. It requires consistent, responsible financial behavior over time, including timely payments, low credit utilization and a mix of credit types. Keep in mind that your savings are a key part of your your overall finances, supporting your journey toward a robust financial future.
FAQ
Here are some answers to frequently asked questions about saving money and your credit score.- Does putting money in savings increase credit?
- No, putting money in a savings account does not directly increase your credit score. Your credit score is mainly influenced by how you manage debts and credit, not by how much you save. However, having savings can indirectly help with financial stability, which is beneficial when applying for loans.
- Is it smart to put all your money in savings?
- Putting all your money in savings isn't typically advised. It's smart to diversify: keep some in savings for emergencies, some in checking for everyday expenses and consider investing a portion for long-term growth. This approach balances safety with opportunities for your money to grow, ensuring you're prepared for both immediate needs and future financial goals.
- How can I improve my credit score quickly?
- To improve your credit score quickly, pay down debts, especially on credit cards, to lower your credit utilization. Make all bill payments on time, as payment history is crucial. Avoid opening new credit accounts in a short period. Check your credit report for errors and dispute any inaccuracies. These steps can lead to noticeable improvements in your credit score within a few months.
- What accounts increase credit score?
- Accounts that can increase your credit score include credit cards, mortgages, auto loans, and personal loans, when managed well. Timely payments, low credit utilization on cards, and a good mix of credit types contribute positively to your credit score. It's crucial to use these accounts responsibly and pay bills on time to see an increase in your score.
Editor's note: This article was produced via automated technology and then fine-tuned and verified for accuracy by a member of GOBankingRates' editorial team.
