Another Case For Emergency Savings – Credit Score


You know you need emergency savings right?

Should something come up where you need money quick you want to have emergency savings handy to help take care of the situation.  Well here’s another aspect to think about:

You need emergency savings to protect your credit score!

An emergency comes up.  It could be anything but let’s say you need a major repair to your car.  Without emergency savings where do you get the money?

Like most people you’ll probably turn to your credit cards.

We already know you don’t have the cash so what happens when the credit card bill comes?  That’s right, you don’t pay the bill in full.  There’s probably a good chance you pay the minimum too.  Now you’re carrying debt on your credit card and building up interest charges making your initial emergency even more expensive.

You’ve also increased your debt to credit ratio.  This is a calculation that credit scores look at.  The credit scoring agencies take the amount of credit card debt you have and divides it by your credit limit.  You want this ratio to be as low as possible.

And now, besides the debt for the emergency you have on your card, there’s a good chance you are like most Americans and already have some debt on your card.  That debt to credit ratio is getting higher huh?  The higher this ratio the more points off your credit score you will have.

So you have more debt on your card now.

Are you paying the bill off on time every month?  Credit card companies love it when you make a late payment.  They make a ton of money off late charges and they also get to jack up your interest rates.  But they can also do something else when you pay late (or miss a payment), they can report it to the three credit agencies.  BAM, your credit score just went down!

Emergencies come at all the wrong times don’t they?  Let’s take our example a little further.  You charged your car repairs on your credit card.  Fast forward a few months and perhaps you want to open a savings account, go on a job interview, or get new car insurance.  What is one thing they might do?  Check your credit report!  That’s right, your credit score is used for more than loans.  Your credit score isn’t as good as it was and now it may cost you in ways you didn’t realize!

See how not having enough emergency savings can snowball into all kinds of costs and expenses?!?

It’s important to have some emergency funds stashed away.  Life has a way of throwing you a curveball when you least expect it.

But as you see, not having emergency savings can hurt you in other ways such as lowering your credit score.  Protect yourself and your credit score and start saving up.  Even if it’s only a small amount going into an online savings account it will add up!

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Published or updated October 21, 2013.

Comments

  1. Great post. Another great reason for an Emergency Fund. Tip’d!
    .-= SingleGuyMoney´s last blog ..Save Money On Insurance =-.

  2. Great post, and another great reason for emergency funds!
    .-= Jessie´s last blog ..Kindness really does pay… =-.

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