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).