Let’s face it, most damaged credit could have been saved by building a savings account while building a good credit history. It’s shocking to know that most Americans don’t have $1000 in case of an emergency.
According to a Jan. 2023, Bankrate report only 43% of Americans say they would be able to pay for a $1,000 unplanned expense. That means a plumbing emergency, car repair or unexpected medical expense could cause major chaos to your finances.
And, that’s not including what can happen if a job loss occurs. When a mortgage loan, rent, credit cards, and even utilities go unpaid credit scores will suffer.
Building a savings account can give you peace of mind as well as save your credit scores. In times of financial hardship credit card bills are often the first to go unpaid. That’s understandable.
But when one missed payment can tank a good credit score, it’s important to have emergency savings to at least make the minimum payment.
The amount of your emergency fund will vary depending on your lifestyle, monthly costs, income, and dependents but the rule of thumb is that individuals should have enough in an emergency fund to cover three to six months of living expenses.
Tips for Building a Savings Account
1. Automation reduces the temptation to spend money
Make savings a habit, just like David Bach says in his book, Automatic Millionaire, “You need to have a system that doesn’t depend on your following a budget or being disciplined.”
Automated transfers are a great way to save money since you don’t have to think about it. Don’t pay bills first then save. Save first, then pay your bills.
Have a portion of your paycheck go directly into a high interest savings account.
Almost all banks offer automated transfers between your checking and savings accounts. Automation makes it easy to choose when, how much and where to transfer money to. You can even split your direct deposit between your checking and savings accounts.
Chime will automatically round up transactions to the nearest dollar and transfer the round-up into your savings account. The more you use your Chime debit card, the more you build your savings.
2. Switch to a high-interest savings account
Over a decade ago you could find multiple banks offering 4-6 percent annual returns. Not today though, unless you switch to an online high-yield savings account.
Currently, the average national savings rate is 0.40% APY with big banks offering even less.
However, despite the potential benefits of transferring funds to a savings account with a higher interest rate, many people see, hesitant to do so. This reluctance may stem from a familiarity with low savings rates and a skepticism that higher rates will continue.
The interest rate on a savings account can make a big difference in how much you earn over time. While the impact may be small for those with lower balances, those with larger savings can see a significant increase in earnings. For example, someone with a deposit of $25,000 could earn over $800 in interest after a year at a rate of 3.3 percent, compared to a mere $2.50 at a rate of 0.01 percent. So, it's important to shop around and find the best interest rate for your savings goals.
Your best bet is likely an online bank account. Online banks can offer a slightly higher interest rate because they have less overhead costs than a bank with physical locations.
3. Pay yourself first
Get into the habit of paying yourself first. It may seem difficult but building a savings account involves paying yourself before you pay bills. Here is how you can start saving money:
- Start small if you think you can't afford to pay yourself first.
- Examine your expenses to find something you can cut-out, even if it's something small.
- Pack your lunch, do your own nails, cut your own hair.
- Get a temporary side-job, if possible, to build up your savings account.
- Call your cable company to request those great introductory rates given to new customers.
- Look for opportunities to increase payments to yourself.
- Say NO to family members that habitually borrow.
- Split your direct deposit so that an amount goes directly into your savings account before you can spend it.
- Set up an automatic transfer for each payday – You can set up, modify, and cancel transfers as needed so don't worry if you have to change it.
- Treat the money you save as off-limits – it's an emergency fund only.
Check out these saving money tips that help make saving simple.
Does opening a savings account affect credit scores
Banks can run a credit report to verify your identity but it will likely be a soft credit inquiry. A soft inquiry has no impact on your credit scores.
Banks may also pull your bank account history report through ChexSystems. ChexSystems is a type of consumer reporting agency similar to credit bureaus. The difference is ChexSystems only maintains negative information on consumers' banking habits such as a history of overdrafts or if your account is closed by the bank.
You may need to find banks that don't use ChexSystems if you have ChexSystems records.
Is having multiple bank accounts bad for credit
No. Credit scoring systems don't consider how many bank accounts you have when calculating credit scores. Plus, most lenders don't consider how many bank accounts you have when making credit decisions.
While most people maintain accounts at one bank because it simplifies the banking process, there are many reasons why having multiple bank accounts is good for your finances, for example:
- Banks that offer sign-up bonuses can put free money in your pockets.
- Online banks that offer higher savings account rates can grow your money faster.
- Having accounts at different bank spreads your financial risk. If one bank experiences financial difficulties your accounts at other banks remain safe. Plus, most banks are only FDIC-insured up to $250,000 per account.
- By having accounts at different banks, you can access a wider range of financial products such as credit cards, loans, and savings accounts. This can allow you to take advantage of better interest rates or terms and conditions.
Minimum payments on credit card bills can save your credit score
Lastly, it's vital to have enough money to pay at least the minimum on credit card and other bills. While paying only the minimum due on credit cards is not the ideal situation, it can help keep your credit scores afloat until you get back on track with your finances.
Paying only the minimum due causes you to pay more interest and takes the longest to repay your balance but missing payments can tank your credit scores.
If you miss your minimum payment or pay less than the minimum, you can end up with a late fee charge. After two missed minimum payments in a row, your credit card issuer may raise your interest rate to the penalty rate.
After your minimum payment is more than 30 days late, the credit card issuer will report the late payment to the credit bureaus. This late payment will go on your credit report and remain for seven years.
Late payments can lead to charge-offs and here is how:
Missed payments progress in 30-day increments
- 30 days late
- 60 days late
- 90 days late
- 120 days late – until you reach 180 days late.
After 180 days (6 months) of missed payments, your account will be charged off. Even if you’ve made partial payments, your account can be charged-off.
Having sufficient savings can help you avoid damage to your credit score, even if you can only make the minimum payments.