Having some cash stashed away in a savings account for a rainy day is not going to directly affect your credit score.
(I know that might leave you scratching your head since you just read an article headline that says the direct opposite.)
That is not to say, however, that having some money stashed away doesn’t indirectly affect your credit score.
This might sound like crazy talk, but hang in there with me for a few minutes to see exactly how your cash savings might just be the superhero that saves your credit score.
Losing Your Job
One day you have a job, the next day you don’t. Saving has never been a priority for you, so you have nothing in the bank beyond your most recent paycheck.
Now, you don’t have any money coming in. If you had savings, at least you could live off of that until you land a new job. You deplete your bank account, you pay for what you can with a credit card, and the rest just goes unpaid.
That’s a blow to your bank account and a double whammy to your credit score. Increasing the amount of debt you have on your credit line lowers your credit score and those unpaid bills mean late payments, no payments, and collection accounts, which all put a major dent in your credit score.
The doctor delivers the bad news to you during one of your routine office visits. You have cancer. Just to make matters worse, you have health insurance, but it stinks. It doesn’t cover anything you need it to cover.
During your treatment, the medical bills are just rolling in. You have a huge stack of bills, totaling an amount you can’t even imagine paying off. While you have worked out a payment plan with your hospitals and providers, you can’t even afford to pay the monthly payment.
All of those treatments are making you sick, which means missed days at work—days you don’t get paid for. So, not only are the medical bills piling up, but you also don’t have the money coming in you need to pay your normal bills.
Since you have no savings to cover the monthly payments for your normal living expenses and you definitely don’t have the money to cover your medical expenses, all of your bills (medical and not) go into collection and there goes your credit score.
If you had some cold hard cash stashed away for an emergency like this, you could have kept your head above water and your credit score wouldn’t be in the toilet right now.
Your beautiful old Victorian-style home needs a new roof. It’s not that a tree fell through it or a tornado blew through. That, you homeowners insurance would cover. It’s just old and needs replacing.
Roofs cost (usually) tens of thousands of dollars to replace. If you don’t have at least some extra cash on hand, you have to turn to other sources for funds. You do, after all, need a roof over your head (literally).
If you have to turn to your retirement savings or put the whole darn thing on a credit card, then you start to spiral into debt that can affect your future, and can even affect your credit.
Let’s say you live in Florida or right in the depths of tornado alley. Natural disasters like hurricanes and tornadoes are right up your alley (no pun intended). The problem these days is that insurance companies aren’t offering hurricane or tornado insurance policies in these high-risk areas anymore.
So, guess what? If you buy a new home and it’s in sunny Miami, Florida and Hurricane What’s-its-name is barreling down on you, you’re fully responsible for repairing any damages to your home.
Don’t let the natural disaster fool you, either. Maybe you live in a flood zone or insert other natural disaster here.
After the storm passes, you realize the house repairs consist mostly of getting the water out of your living room, repairing drywall, painting, and replacing the furniture. It could be worse. If you have cash savings to turn to, then these repairs don’t seem that bad.
It’s when you don’t have the cash to cover it that you end up burning up all your credit cards with the repair costs. There goes your credit score.
I don’t know about you, but I sleep a lot better at night when I know that I have a cushion of cash tucked away in the bank. It’s a huge stress reliever for me, and probably for most people, to know that in case of an emergency or unexpected expense that I have something to fall back on.
For most, maxing out their credit cards is not the ideal plan to have in place. This just increases the amount of your overall debt, which can affect your credit. If you run up the credit card debt too much, it can even become difficult to make the minimum payments, let alone paying off the debt.
I think we all know how that story ends.
Some of us love Fifi or Fido as much as we do our human children. It means we’ll do anything to save them, including paying the vet bills. This happened to me last year. My beloved 14-year-old Jack Russell got cancer. The oncology bills were thousands of dollars and I still wasn’t able to save him.
I had money stashed away, so I used that money rather than having to charge it on a credit card.
If you don’t pay your vet bills, off to collections they go and down the toilet your credit goes.
Keeps You Out of Debt
No matter what your emergency or urgent need for cash is, if you don’t have actual cash on hand, you’re likely to turn to credit cards or taking out loans. Accumulating debt can have all sorts of effects on your credit (none of which are good).
If you have a rainy day fund, it eliminates your need for running up your credit card bills or establishing loans—all of which can damage your credit rather than help it.