Do certificates of deposit help build credit?
A certificate of deposit (CD) is a financial product that is similar to a typical savings account, and is offered by banks, credit unions and other financial institutions. The Federal Deposit Insurance Corp. (FDIC) and the National Credit Union Association (NCUA) are organizations that insure CDs, making these types of investments practically risk free. Unlike normal savings accounts, CDs have a fixed term of usually one, three, six or 12 months, though some may have up to a 10-year term. Also, CDs typically have a fixed rate of interest attached to them.
- A certificate of deposit (CD) is a long-term deposit instrument that pays a guaranteed fixed interest rate through to maturity.
- These are considered bank deposits and are so federally insured up to the $250,000 FDIC limit per banking institution,
- Loans taken against a CD can be reported to credit agencies, which can help savers build credit scores in a relatively low-risk fashion.
Certificates of Deposit
A certificate of deposit (CD) is a product offered by banks and credit unions that offers an interest rate premium in exchange for the customer agreeing to leave a lump-sum deposit untouched for a predetermined period of time. Almost all consumer financial institutions offer them, although it’s up to each bank which CD terms it wants to offer, how much higher the rate will be vs. the bank’s savings and money market products, and what penalties it applies for early withdrawal.
Unlike most other investments, certificates of deposit, or CDs, offer fixed, safe—and generally federally insured—interest rates that can often be higher than the rates paid by many bank accounts. And CD rates are generally higher if you’re willing to sock your money away for longer periods.
As a result of the Federal Reserve’s rate hikes since 2017, CDs have become a more attractive option for savers who want to earn more than most savings, checking, or money market accounts pay, but without taking on the risk or volatility of the market.
Using a CD to Build Credit
Since CDs are fixed-term deposits an investor gives to a bank for a fixed rate of return, an investor can use CDs to build or strengthen their credit history. Minimum investments for CDs are usually $1,000. The institution issuing the CD typically allows the investor to borrow up to 95% of the investment’s value shortly after opening the account, to be used as collateral in case of default.
Banks or credit unions generally, but not always, report this type of loan to the credit bureaus as a secured installment loan. Thus, it is wise to confirm with the institution that the reporting is occurring. Making punctual payments on this loan increases a person’s credit score over time, and the process can be repeated indefinitely. CDs are completely secured, such that the institution involved rarely refuses to make this type of loan, and for this reason they are an excellent option for someone trying to build or repair a poor credit score.
Are CDs a good place for savings?
A CD is an investment, not a transactional account for savings. If you need to withdraw the money from your CD before it reaches maturity you will be penalized.
How do I open a CD account?
CDs are offered through banks and credit unions. CD accounts can be set up and investments can be made online or in person. Certificates of deposit that are offered through commercial banks are insured by the FDIC up to $250,000 per account. It’s also possible to invest in certificates of deposit through brokerage firms.