How to Build Your Credit by Buying a CD

A CD can act as collateral on personal loans for those with no credit.

A CD can act as collateral on personal loans for those with no credit.

Certificates of deposit, or CDs, are fixed-term deposits you give your bank in exchange for a certain percentage rate of interest when the CD comes due. You give the bank a lump sum amount of money for a set period of time. When the time period passes, the bank returns your money along with all interest accrued. For young couples trying to build credit, buying a CD allows you to take out a personal loan using the CD as collateral. Making on-time payments to the bank builds your credit history.

Step 1

Contact your personal bank about opening a CD secured loan with them. Get their minimum balance, rates and term lengths for the CD. Also, find out about the interest rates they charge for personal loans and loan requirements. Shop around to other banks that issue personal loans and CDs to find the best rates and deals. It is important to make sure that the bank you use reports personal loans to the credit-reporting agencies. Without this benefit, CD-secured loans do not help you build credit.

Step 2

Decide on the bank with whom you want to do business. Talk to one of their bankers about opening up a CD secure loan.

Step 3

Fill out their personal loan application for the amount you want to borrow. These types of secured loans are easier to approve because your CD acts as collateral against default. When approved, provide the bank with the funds to secure the CD and get a check for the personal loan. If denied, try another bank. Just don’t fill out too many credit applications. This adversely affects your credit score.

Step 4

Make consistent on-time payments to your bank. Your bank reports the loan and payment history to your credit report. As you establish a history of on-time payments, you build credit and increase your credit score.

Warning

  • CD-secured loans may not the best idea if you have other options such as a secured credit card. The money you are earning from the CD interest will be partly offset by the interest you will be paying on the loan.

About the Author

Leigh Thompson began writing in 2007 and specializes in creating content for websites. She has been published online in various capacities. Thompson has an associate degree in information technology from the University of Kansas and is working on a bachelor's degree in business and personal finance.

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