Does opening a high-yield savings account affect credit score?
Although opening a high-yield savings account can offer many benefits, it won't help you build a credit history. That's because bank account activity typically isn't reported to credit bureaus and doesn't affect your credit score.
Not a good fit for long-term savings
High-yield savings accounts earn you more money than brick-and-mortar bank accounts do. But often, you still won't earn enough to keep up with inflation. Even though your account balance rises, your buying power decreases.
You can't lose your money because, just like your regular checking and savings accounts, the money is insured by the Federal Deposit Insurance Corporation up to $250,000. Of course, the APY for any savings vehicle can go up or down, especially if the Federal Reserve changes its benchmark fund rate.
So it's a valid concern to question whether opening a savings account affects your credit score. The short answer is no; it doesn't. Opening a savings account will not harm nor help your credit score. Similarly, your credit history shouldn't affect your ability to open an account.
The interest you earn on a high-yield savings accountâor any other savings account, money market account or certificate of deposit, for that matterâis subject to state and federal income taxes.
5% APY: With a 5% CD or high-yield savings account, your $50,000 will accumulate $2,500 in interest in one year. 5.25% APY: A 5.25% CD or high-yield savings account will bring you $2,625 in interest within a year.
Pros and cons of a high-yield savings account
A high-yield savings account offers a higher rate of return on your money compared to standard savings accounts. But some of these accounts charge fees, have minimum balances requirements, and offer variable interest rates that can go up and down over time.
Your credit score is not directly affected by your checking and savings account activity. That includes account closures. Checking and savings accounts are not considered credit accounts.
Higher rates: Rates on high-yield savings accounts are approaching 5% right now. That's equivalent to an extra $500 earned on a $10,000 deposit over one year, simply made by transferring funds from a regular account into a high-yield one.
Millionaires Like High-Yield Savings, but Not as Much as Other Accounts. Usually offering significantly more interest than a traditional savings account, high-yield savings accounts have blown up in popularity among everyone, including millionaires.
Does opening a new savings account hurt credit?
Opening a savings account does not impact your credit score because you aren't borrowing money and the activity in your savings account isn't reported to a credit agency. Most financial institutions will run a soft credit inquiry when you open a savings account but it is only to check your identity.
- Interest rates are variable, not fixed.
- Inflation might erode the value of your savings.
- Some financial institutions require a minimum balance to earn the highest interest rate.
- Some accounts might charge fees.
The most important factor of your FICOÂŽ Scoreâ , used by 90% of top lenders, is your payment history, or how you've managed your credit accounts. Close behind is the amounts owedâand more specifically how much of your available credit you're usingâon your credit accounts. The three other factors carry less weight.
Limited growth. Despite high APYs and compounding interest, high-yield savings accounts generally don't keep pace with inflationâwhich means they're not ideally suited for achieving longer-term financial goals, like boosting your retirement nest egg.
Gaines reiterates that even most high-yield savings accounts lose value to inflation over time. âMore than two months' worth of living expenses in a savings account is too much given the ability to earn around 5% from easily accessible money market accounts that should not fluctuate in price.â
Once the term is over, you can withdraw the money and the interest you earned without penalty.
At a 4.25% annual interest rate, your $100,000 deposit would earn a total of $4,250 in interest over the course of a year if interest compounds annually. Annual total: $104,250.
If your high-yield savings account comes with ATM access, there may be fees associated with using ATMs outside of the bank's network. These fees could exceed the interest you earn, leading to a net loss in your account balance. Before opening an account, be sure you understand the terms and how to avoid fees.
Not the best choice for long-term savings â High-yield savings accounts offer much better interest rates than traditional savings accounts, but often, you won't earn enough over the long-term to account for inflation. Investments may be a better option for a longer-term, greater yield.
It's possible, but it isn't realistic for everyone. Living off of interest relies on having a large enough balance invested that your regular interest earnings meet your salary needs. Rest assured that you don't need to earn a million dollar paycheck to reach your goal.
How long do you need to keep money in a high-yield savings account?
Your emergency fund
A high-yield savings account can be a great place to store your emergency savings. Most experts suggest that you should keep between three and six months' worth of expenses in your emergency account at all times.
If you deposit $50,000 into a traditional savings account with a 0.46%, you'll earn just $230 in total interest after one year. But if you deposit that amount into a high-yield savings account with a 5.32% APY,* your one-year interest soars to over $2,660.
While they aim to offer higher interest rates than traditional savings accounts, these rates may fluctuate over time due to changes in the financial market or the financial institution's policies.
Opening a new high-yield savings account doesn't require a credit check.
Certificates of Deposit
Like high-yield savings accounts, CDs usually offer substantially higher annual percentage yields (APYs) than traditional savings accounts. As of October 2023, the average CD rates range from 4.60% to 5.55%, according to the Federal Deposit Insurance Corp.
