In this article:
- Does Opening a CD Hurt Your Credit?
- Does Closing a CD Hurt Your Credit?
- Can a CD Help Build Credit?
- How to Open a CD
Anytime you apply for a line of credit or loan, the creditor typically runs a credit check to help determine your eligibility. Your credit isn't usually checked or impacted when opening a deposit account, such as a certificate of deposit (CD).
However, there can be some exceptions. Here's what you need to know about whether opening a CD can impact your credit.
Does Opening a CD Hurt Your Credit?
The short answer is no, opening a CD generally will not hurt your credit. That's because you're not borrowing money; a CD is a type of savings account, which usually doesn't require a credit check.
With a CD, you aren't borrowing someone else's money and repaying it with interest. It's actually the opposite: You're giving a bank or credit union your money for a set time period; in exchange, you receive it back with interest when it reaches maturity at the end of the term.
Some financial institutions may run a "soft" credit check when a customer applies to open a deposit account. This is typically intended to confirm your identity rather than assess your credit score. Soft inquiries don't impact credit scores.
While less common, it's possible that a bank or credit union could run a "hard" credit check, or hard inquiry, when considering a CD application. It's often not advertised if the institution does a credit pull and what type, so it may be worth asking when seeking a CD since hard inquiries can temporarily hurt your credit slightly. The impact is minor and short-lasting, but it's not ideal if it happens at the same time as you're applying for a loan or line of credit and want your score to be in tip-top shape.
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Does Closing a CD Hurt Your Credit?
CDs usually offer competitive interest rates in exchange for a requirement to keep your money parked for a set term, such as six months or a year. If you withdraw early, you'll not just earn less interest, but you may owe a penalty.
Whether you withdraw early or at the end of the term, your credit won't be impacted since it's your money. Because CDs aren't a loan or credit account, your actions, including withdrawing money or closing out the account, aren't 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.
You can use other tactics to bolster and improve credit, which could include:
- 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, since 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.
