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.
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. 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. Want to read more content like this? Sign up for The Balance’s newsletter for daily insights, analysis, and financial tips, all delivered straight to your inbox every morning!
