Having a savings account is not directly related to your credit score. Still, it can indirectly positively impact your credit score. A savings account is a basic financial tool that helps you save some money and manage your expenses. It is also a key factor in building a strong financial foundation, which can ultimately lead to a better credit score.
A credit score is a representation of your creditworthiness that lenders use to determine the likelihood of you repaying your debts. A higher credit score indicates that you are a low-risk borrower and vice versa. Credit scores are calculated based on factors such as your payment history, credit utilization, length of credit history, types of credit accounts, and new credit applications.
While a savings account does not directly affect your credit score, it can indirectly help improve it in several ways. Here are a few ways a savings account can help improve your credit score:
- Establishing a banking relationship
Banks and other financial institutions consider a banking relationship a sign of financial stability and responsibility. Opening a savings account is the first step in establishing a banking relationship. Having a savings account for an extended period of time can demonstrate your ability to manage your finances responsibly, which can ultimately help you build a positive credit history.
- Demonstrating financial stability
Having a savings account can also demonstrate your financial stability, which is an important factor in determining your creditworthiness. Lenders want to see that you have a stable income source and can manage your expenses responsibly. By consistently saving money in your savings account, you demonstrate your ability to manage your finances effectively. You are less likely to default on a loan or credit card payment.
- Building an emergency fund
An emergency fund is a pool of fund that you set aside for unexpected expenses, such as a medical emergency, car repair, or job loss. Building an emergency fund can help you avoid taking on debt in the event of an unexpected expense, which can ultimately help you maintain a good credit score. Having a savings account can also help you build an emergency fund.
- Showing regular income
A savings account can also demonstrate that you have a regular income. By depositing money into your savings account regularly, you show that you have a steady source of income, which can ultimately help you when you are in need of a loan, thus indirectly helping you build a positive credit history.
To wrap up
By saving money and being financially responsible, you can improve your creditworthiness and increase your chances of being approved for credit. Therefore, it’s a smart move to start building your savings today and create a savings account as a stepping stone to building a positive credit behaviour.
