Does Investing Money Influence My Credit?

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Investing is an essential part of financial stability, and yet, nearly one-third of Americans have no savings at all, not to mention a long-term retirement plan. What is the benefit of investing? What are the risks? Is your credit score affected? Answering these questions is imperative. When it comes to credit health, cash-on-hand and investing have the following effects:

  • Scoring. A popular rumor suggests that income and savings are directly related to credit scoring. Fortunately, this rumor is false. While the application of income—i.e., paying bills, using credit and qualifying for loans—does promote creditworthiness, the sum in your bank account has no effect on your score.
  • Liquid savings. Investing cash means sacrificing liquid savings for a greater goal. While investing is wise and encouraged, emptying your emergency fund is not. No savings means relying on credit for unforeseen bills, repairs and loss of wages. As your reliance increases, so will your credit utilization ratio and difficulty paying off debts. The result is credit damage.
  • Long-term savings. For every year of retirement, the average person should save at least 80 percent of their last income. Suppose you earn $80,000 in your final job before retirement. You’ll need at least $64,000 to sustain a lifestyle after leaving work. If you plan to retire for 25 years, $1.6 million is necessary. Those who fail to save must continue working, survive on miniscule Social Security benefits or downgrade their lifestyles. In worst case scenarios, aging Americans lose their homes to bankruptcy, live with crippling debt and suffer years of credit damage. In these situations the link between investing and credit health is clear.
  • Risk. Investing in any venture comes with inherent risk. While the hope is growth, a fickle market can damage even the most conservative portfolio. Money lost means difficulty paying bills and sustaining long-term goals. Diversity will help minimize these risks, and it’s important to consult a professional about the safest route for your family.
  • Dividends. The flipside of risk is dividends. Wise investing and healthy growth produces resources that will last years and even decades, allowing you to afford the things you need while maintaining positive credit.

The bottom line: Investing may not directly affect your credit, but the consequences of little savings are sure to carry burdens. Talk to a financial planner about your goals and allow time to work in your favor.

Posted in Credit Score
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