helping your credit score, credit score tips, emergency fund advantagesYour three-digit FICO credit score is a key number, one that lenders use to determine who qualifies for loans and at what interest rates.

How often you miss payments, how much debt you owe on your credit cards and how much of your credit you are using all help determine how high this score is. But, the amount of money in your savings account, though, has no impact on your score.

That doesn’t mean, though, that having money stocked away to cover the cost of unexpected emergencies won’t have a positive impact on your credit score.

Not having this money — often called an emergency fund — could cause your FICO score to plummet, if you run into bad financial or employment luck.

The message here is simple: Save plenty of money for emergencies. If you don’t, you might find yourself missing payments or running up your credit card debt.

And that will damage your FICO score.

How emergency funds work

You’ve probably heard that building an emergency fund is a smart financial move.

But you might not know how much money you should keep in your fund, where you should save this money and what you should use it for.

First, financial experts recommend that you have at least six months of daily living expenses saved in your emergency fund. At minimum, your emergency fund should be as large as your deductible.

More, though, is better, and to be safe your goal should be to have as much as 18 months of daily living expenses saved up.

If your daily living expenses for the month come out to $3,000 — including the money you’d need to pay all your bills on time — you’d need $9,000 for an emergency fund of three months, $18,000 for a fund good for six months and $36,000 for one that could last you an entire year.

The goal isn’t to earn a lot of interest on this money. But it still makes sense to save it in a savings account with the highest interest rate you can find.

You should then only spend this money on unexpected emergencies.

Say your water heater suddenly bursts. Use your emergency fund money to pay for a replacement. If you face a large car-repair bill, you can turn to your emergency fund. The goal is to use the money you’ve saved instead of putting unexpected expenses on your credit card.

How emergency funds help your credit score

It’s true that the money you’ve saved won’t help your FICO score. But what if you don’t have an emergency fund and your furnace suddenly breaks? If you don’t have any money saved to replace it, you’ll have to put that big bill on your credit card.

If your car’s transmission goes out the same week, you’ll have to put that money on your credit card, too. This will increase your credit-card debt, something that does have a direct impact on your credit score and will cause it to fall.

You’ll also be using a greater percentage of your available credit, another factor that will hurt your score. If you had an emergency fund to pay for these unexpected expenses, you would have avoided both negatives.

Maybe you dip into your regular savings account to pay for these repairs. Suddenly, when the next bill arrives in your mailbox — maybe your monthly mortgage or car payment — you don’t have enough money to pay it on time.

If your lack of funds means that you pay this bill 30 days or more late, you’ll suffer a big hit to your credit score, usually a drop of 100 points or more.

Again, having an emergency fund means that you don’t have to dip into the savings account you use to pay your other bills, making it less likely that you’ll miss payments or pay your bills late.

Building that fund

Saving $9,000, $18,000 or more seems intimidating. But financial pros say that you can build your fund slowly over time. Even if you contribute just $10 a week, that comes out to $520 saved each year.

If you can save $20 a week, you’ll have more than $1,000 saved by the end of a year.

The key then? Contribute what you can, and do it on a regular basis.

Dan Rafter is a freelance writer with more than 20 years of experience covering financial topics. He has written for the Chicago Tribune, Wise Bread, Washington Post, Consumers Digest, and several other publications.


Check out our popular posts:

Join the Thousandaire newsletter

Screen shot 2017 04 25 at 1.36.50 pm

Subscribe to get our latest content by email.

Powered by ConvertKit
Spread the love