Understanding the Impact of Certificates of Deposit (CDs) on Your Credit

When it comes to managing your finances, understanding how different financial products affect your credit score is crucial. One such product is the Certificate of Deposit (CD). In this blog, we will explore whether opening or closing a CD impacts your credit, how CDs can help build credit, and the steps to open a CD. If you have any mortgage service needs, feel free to call O1ne Mortgage at 213-732-3074. We are here to assist you!

Does Opening a CD Hurt Your Credit?

The short answer is no, opening a CD generally will not hurt your credit. A CD is a type of savings account where you deposit money for a set period, and in return, you earn interest. Since you are not borrowing money, a credit check is usually not required. However, there are some exceptions.

Some financial institutions may run a “soft” credit check when you apply to open a deposit account. This is typically done to confirm your identity rather than assess your credit score. Soft inquiries do not impact credit scores. While less common, a bank or credit union could run a “hard” credit check when considering a CD application. Hard inquiries can temporarily hurt your credit slightly, but the impact is minor and short-lasting. It’s worth asking the institution if they perform a credit pull and what type it is, especially if you are applying for a loan or line of credit simultaneously.

Does Closing a CD Hurt Your Credit?

CDs usually offer competitive interest rates in exchange for keeping your money parked for a set term, such as six months or a year. If you withdraw early, you may earn less interest and owe a penalty. However, whether you withdraw early or at the end of the term, your credit will not be impacted since it’s your money. CDs are not loans or credit accounts, so your actions, including withdrawing money or closing the account, are not reported to the credit bureaus or factored into your credit score.

Can a CD Help Build Credit?

Regular CDs won’t help you build credit on their own since the main types of accounts that appear on your credit report are loans, credit cards, and lines of credit, as well as accounts in collections. However, you can use other tactics to bolster and improve your credit:

• Pay all bills, from credit cards to utilities, on time, every time. Consider enrolling in autopay to make this easier. On-time payments are the single most important factor in your credit score calculation.

• Keep your credit card balances and overall debt load as low as possible.

• Don’t apply for many new credit accounts in a short time, as a large number of hard inquiries in a limited period can harm your score.

• If you don’t have one, get a credit card—a secured credit card may be a good option if you have a limited credit history—and use it regularly and make payments on time.

• Avoid closing old credit accounts in good standing. This will decrease your total available credit and thus increase your overall credit utilization ratio, which is an important factor in your score’s calculation.

What Is a CD-Secured Loan?

Even though a typical CD account doesn’t help you build credit, there is a way to incorporate CDs into that mission. Some financial institutions offer loans secured by a savings account or CD, called credit-builder loans, as a way to establish credit history. They don’t work like typical loans but are more of a workaround to establish a positive payment history.

With a credit-builder loan, you get approved for a small amount, usually $1,000 or less. You repay it over a short term, anywhere between six and 24 months. But unlike a traditional loan, you don’t get the money upfront. Instead, the bank or credit union sets the funds aside in either a CD or a secured savings account while you make payments.

Your lender reports your payments to the credit bureaus (Experian, TransUnion, and Equifax), helping you establish credit history. Then, once you pay off the loan, you get the money potentially plus interest. These unique accounts aren’t like typical loans and won’t be helpful if you need to borrow money for an immediate purpose. But if your primary goal is to build credit, they can be worthwhile. Just make sure the financial institution reports payments to the credit bureaus—not all do.

How to Open a CD

Ready to become the proud owner of a CD? Just follow these easy steps to choose a CD account:

Shop Around for Rates

Don’t assume you should open your CD with your existing financial institution. CD interest rates can vary across banks and credit unions, and they’re even offered by some brokerages. Do some research to see where you might be able to score the best rate. Sometimes, you can earn a higher interest rate by committing to a longer time period or depositing a higher amount.

Compare Terms

Account terms and rules can also vary, so see how these stack up. For example, CDs commonly charge a penalty fee if you withdraw money prior to maturity, but some don’t charge this fee as a way to entice new customers—though interest rates may be lower in exchange for the benefit. Additionally, some financial institutions allow you to increase your interest rate during the CD’s term, while others don’t.

Apply to Open an Account

Now you can apply to open the CD account, though if your CD of choice is with a financial institution you don’t bank with, you may need to complete a few extra steps to become a new customer. For example, with a credit union, you’ll have to meet eligibility requirements and likely open a savings account before you can open other account types, such as a CD.

Fund It … and Forget It

Once your CD is approved, you’ll transfer money to fund it. Depending on the account, you may be required to start with a minimum amount. Then, it’s time to pretend that money doesn’t exist, especially if your CD comes with early withdrawal penalties. Once the CD matures, you can close the account and withdraw what you deposited plus the interest you’ve earned. Or, you can put it into a new CD.

The Bottom Line

From opening a CD to closing one, these accounts generally don’t impact your credit. The only time it could make a difference is if your financial institution runs a hard credit inquiry upon application. If that’s the case and you’re worried about a potential ding to your credit score, take other measures to improve your credit score (and remember that a single hard inquiry will only have a small, temporary impact, if any). Also consider signing up for free credit monitoring from Experian, so you can keep tabs on how your financial activities directly impact your credit.

If you have any mortgage service needs, don’t hesitate to call O1ne Mortgage at 213-732-3074. We are here to assist you with all your financial needs!