How Opening a CD Could Affect Your Credit Score

Opening a certificate of deposit (CD) doesn't directly affect your credit score. It's a deposit account, not a line of credit, so it isn't reported to credit bureaus.

1. Initial Bank Inquiry: When you open a CD, especially at a new institution, the bank may perform a hard credit inquiry to verify your identity. This can cause a minor, temporary dip in your credit score.
2. Funding Method: If you fund the CD with a personal loan or a credit card cash advance, that new debt or increased credit utilization will be reported and can negatively impact your score.
3. Reduced Liquidity: Locking your money in a CD reduces your available cash. If this leads to a late payment on other debts, like a car loan or credit card, that missed payment will harm your credit.
4. Using the CD as Collateral: Some people take out a CD-secured loan. This new loan is a credit product that gets reported to the bureaus, affecting your credit mix and payment history.

How Much Will Opening a CD Affect Your Credit Score?

While opening a certificate of deposit (CD) generally has a minimal effect on your credit, there are a few factors to consider. Here’s what you should know about the potential impact on your score.

• Hard Inquiry: Opening a CD may trigger a hard inquiry on your credit report. This can cause a small, temporary dip in your score that usually recovers within a few months.
• Credit Mix: A CD can diversify your credit mix, which is a positive scoring factor. Having different types of accounts shows you can responsibly manage various forms of credit over time.
• Credit Utilization: Since CDs do not have a credit limit, they won't impact your credit utilization ratio. This major scoring factor, which compares your balances to your limits, will remain unaffected.

How You Can Avoid Opening a CD Affecting Your Credit Score

Choose Institutions Without Hard Inquiries

Many banks and credit unions open CDs using a soft credit pull, which does not affect your credit score. Before applying, research the financial institution's policy on new accounts to ensure they don't perform a hard inquiry that could impact your credit history.

Leverage Existing Banking Relationships

Consider opening a CD at a bank where you already have a checking or savings account. Financial institutions are often less likely to perform a hard credit check on existing customers since they have an established relationship and have already verified your identity.

Inquire Directly Before Applying

The most straightforward approach is to ask the bank or credit union directly. Contact customer service and inquire if opening a certificate of deposit involves a hard or soft credit pull. This simple step provides clarity and helps you avoid any surprises.

Ways to Improve Your Credit Score

Improving your credit score is always possible and achievable through consistent, positive financial behaviors. While it takes time, most people see meaningful changes within three to six months by taking a few key steps.

• Monitor your credit reports regularly. Obtain free reports from all three major bureaus to identify and dispute inaccuracies or signs of identity theft that could be hurting your score.
• Establish automatic bill payments. Your payment history is the most significant factor in your score, so setting up automatic payments ensures you never miss a due date.
• Reduce your credit utilization ratio. Aim to keep your credit usage below 30% of your total available credit by paying down balances or requesting credit limit increases.
• Become an authorized user. Being added to a credit card account with a long history of on-time payments and low utilization can help improve your own credit profile.
• Diversify your credit mix. Lenders like to see that you can responsibly manage different types of credit, such as installment loans and revolving credit accounts.
• Limit hard inquiries. Avoid applying for too many new credit accounts in a short period, and use prequalification tools when shopping for loans to protect your score.

The Bottom Line

Opening a CD doesn't directly impact your credit score. As a deposit account, not a loan, it isn't reported to credit bureaus and won't affect your credit history.

Frequently Asked Questions

Will opening a CD involve a hard credit inquiry?

Generally, no. Financial institutions typically perform a soft credit inquiry when you open a CD, which does not affect your credit score at all.

Can a CD help me build a credit history?

A standard CD does not build your credit history. Since it's a deposit account, not a loan, your activity isn't reported to the credit bureaus.

Does closing a CD early hurt my credit score?

Closing a CD early will not impact your credit score. You will likely incur an early withdrawal penalty, but this is a financial fee, not a credit event.