Does It Affect Credit Scores to Withdraw a CD Early?

CDs are conservative, shorter-term investments for savers.

CDs are conservative, shorter-term investments for savers.

Although there can be financial penalties for withdrawing a certificate of deposit early, making an investment decision has no effect on your credit. Credit scores are only affected by how you handle your credit accounts such as car loans, credit cards or a home mortgage. Because a CD is an investment, not a credit account, it doesn't appear on your credit report.

Early Withdrawal

A CD is essentially a loan between you and a bank. When you buy a CD, the bank takes your money and agrees to pay it back at a certain date, along with interest. That payback date is known as the maturity date. If you take your money out before this date, you're making an early withdrawal. Banks use money from CD investors to make loans or buy other securities such as Treasury bills. If you request your money before the maturity date, it may cost the bank money to get your money back. As a result, you will face an early withdrawal penalty to help cover the bank's costs and to discourage this practice. An early withdrawal is not the same as a late payment or other negative mark on your credit report.

Bank CDs

Federal law requires that banks charge at least seven days' interest for an early withdrawal of a CD. However, many banks charge a considerable amount more. According to Bankrate.com, typical early withdrawal charges may run from six months' interest on CDs with terms of at least two years to all of the interest on a CD maturing in 30 days.

Brokered CDs

A brokered CD is a bank CD that is bought and sold on the open market. When you buy a brokered CD from a financial services firm, you are not giving money directly to a bank but rather buying a CD that has already been purchased from the bank and is being resold to you. As a result, there is no early withdrawal penalty for selling a brokered CD before its maturity date. However, the price you get for your CD may be more or less than you paid for it. When you sell a brokered CD, you must sell it on the open market at the going price. Generally, if interest rates have risen since you bought your CD, you will have to sell the CD at a loss. This has no bearing on your credit.

CDs as Loan Collateral

The one way a CD can have an effect on your credit is if you use it as collateral for a loan. Some financial institutions will let you borrow up to 95 percent of the value of your CD as a type of secured loan. If your bank reports this loan to the credit reporting agencies, it can help your credit score. Because the loan is backed by the value of the CD, even if you liquidate the CD early, the sales proceeds will pay off the loan, making default improbable. As a result, your loan will be reported as paid in full, which is a positive mark for your credit report.

About the Author

After receiving a Bachelor of Arts in English from UCLA, John Csiszar earned a Certified Financial Planner designation and served 18 years as an investment adviser. Csiszar has served as a technical writer for various financial firms and has extensive experience writing for online publications.

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