If you’re looking for a safe place to invest your money, a Certificate of Deposit could be a good option.
These accounts offer a guaranteed return that is higher than what you would get in a savings or checking account. Though CDs are a type of investment, the way these accounts are set up can affect your credit score.
It is important to understand how a CD will impact your score so you manage these accounts effectively.
How is a CD related to credit?
The reason a CD pays a higher interest rate than your bank account is because CDs tie up your money for a longer period of time.
While you can access the money in your checking or savings account nearly immediately, you are supposed to keep your money in a CD for a set period of months or years.
If you want to take the money out earlier, you can either pay a penalty and cancel the CD or borrow the money from the CD through a loan.
It is because of this loan feature that CDs can impact your credit score.
How can a CD affect your credit score?
A CD can affect your credit score in a few different ways.
When you apply to open a CD, the bank will make an inquiry into your credit report, which will lower your score by a small amount.
“A CD has a bigger impact on
your score when you take out a loan.”
The bank will set up a repayment schedule for your CD loan.
If you make these payments on time, they will improve your credit. If you miss payments, your score will take a hit.
Basically, CD loans have the same sort of impact on your score as other loans and your credit card.
Do CD rates matter?
The actual rates on a CD do not matter for your credit score.
The rating agencies are not concerned about how much money your CD is earning per month or how much the bank charges you in interest to borrow from your CD.
All that matters is whether you make the CD loan payments on time and the initial inquiry into your credit score.
While it might seem surprising that a CD can impact your credit, when you consider the CD loan system, it makes sense.
Keep this information in mind as you handle this investment so it helps rather than hurts your score.
Photo source: blog.score.org