Does a Certificate of Deposit Build Credit?

Leveraging investments for better credit

Person looking over paperwork.
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If you're exploring ways to build credit, you might be considering whether a CD is an option. While a CD isn't technically a credit obligation, you can leverage your investment to help your credit.

Key Takeaways

  • A certificate of deposit is an asset, and isn't the type of account regularly reported to credit bureaus.
  • By borrowing against your CD, you can open a loan that reports your credit history.
  • CD-secured loans are more commonly found at smaller, local banks and credit unions.

A CD Doesn’t Build Credit on Its Own

A CD is an asset. The account holds money you've deposited and pays a fixed interest rate when you leave your money invested for a specific amount of time. Since it's not a credit product like a credit card or loan, the bank or credit union holding your CD won't report your account to the credit bureaus.

When you open a credit card or take out a loan, the bank typically reports your account usage to the credit bureaus. Credit bureaus look at all the information reported about you from various businesses, and generate a score that represents your credit risk, including how much you've borrowed, the types of accounts you've taken on, and if you pay on time.

A CD-Secured Loan Can Help You Build Credit

While CDs aren't included in your credit history and don't directly help you build credit, you can use one as collateral for a loan that does report to the credit bureaus. You can do this through a CD-secured loan. Your payments on the CD-secured loan can help you build credit as long as the lender reports your account to the credit bureaus and you repay on time.

Loan Terms and Pricing

Depending on the bank, you can borrow up to 100% of your CD using your deposit as collateral for the loan. You won't miss out on the growth benefits of the CD. Lenders may still pay interest on your CD as you repay your loan.

The loan's repayment period may be fixed, such as 36 months, or it could match the time until your CD’s maturity. The APR, which is the total interest you pay, is typically tied to your CD's APY—your CD’s APY plus 3%, for example.

Applying for a CD-Secured Loan

Your bank may offer the option of applying for a CD-secured loan online, over the phone, or at a local bank branch. When you apply, you'll note how much money you’d like to borrow, your desired repayment term, your CD account number, and your personal information.

Online CD-secured loans may be limited to a bank's existing customers.

Qualifying for a CD-secured loan is easier than with traditional loans and credit cards. Since you're borrowing against your own funds, the lender may forgo verifying your income or requiring a credit history. After approval, you may have access to the loan within one business day.

Is a CD-Secured Loan a Good Way To Build Credit?

Because your CD is collateral for your loan, the lender can seize the funds in your CD if you default on your loan payments. On top of that, payments that are at least 30 days late may go on your credit report and damage your credit even more.

You can't cash in your CD until the loan is fully paid, which means you won't be able to use your CD for any emergencies that come up. So be sure you can afford the monthly payment based on your budget. Once you've locked in the loan terms, your monthly payment is fixed until you've paid the loan in full.

Other Ways To Build Credit

You don't have to put your CD or your savings on the line to build your credit. You can raise your credit score over time by paying down existing credit balances and being diligent about making each of your monthly payments on time. Maintaining a low credit utilization—the percentage of your credit limit you’re using—is a must for building good credit.

Becoming an authorized user on someone else's credit card is another way to build credit, as long as the credit card has a long, positive account history.

Using your savings to make a deposit on a secured credit card is another option. You can keep your monthly payments low by only making small charges that you pay off right away. As long as you keep your account in good standing, your card issuer will return the deposit to you when you close your account.

The Bottom Line

While investing in a CD alone won't help you build credit, you can borrow against a new or existing CD to improve your credit score. A CD-secured loan offers a low-risk and low-cost way to build your credit. You won't be able to tap into the CD until it's completely repaid, so be sure the money you deposit isn’t money you’ll need at a later time.

Frequently Asked Questions (FAQs)

How do you get a CD-secured loan?

You'll typically find loans secured by a CD at smaller banks and credit unions. First, you need to open the CD, depositing at least the amount of money you'd like to borrow. You then can apply for the CD-secured loan, specifying the loan amount and term. You may be able to apply online or over the phone; if not, you'll have to visit a branch to apply.

How do you open a certificate of deposit?

Open a certificate of deposit by choosing a bank and CD. You may need to be an existing bank customer to open the account. Depending on the bank, you can open a new account online, over the phone, or at a local bank branch. Then, you can fund the CD.

How long does it take to build credit?

The time it takes to build credit varies from person to person, depending on the existing information on your credit report, the new accounts you open, and your payments habits with new accounts. If you're starting from scratch, your first account should be open for at least six months before credit bureaus can generate your credit scores.

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Article Sources

  1. Space Coast Credit Union. “Share/CD Secured Loans.”

  2. Consumer Financial Protection Bureau. “Credit Score Myths That Might Be Holding You Back From Improving Your Credit.”

  3. Consumer Financial Protection Bureau. “I Want To Help My Daughter Start Her Credit History. What Should I Do?

  4. Georgia Office of Attorney General Consumer Protection Division. “Secured Credit Cards.”

  5. myFICO. “What Are the Minimum Requirements for a FICO Score?