How To Use A Certificate Of Deposit To Rebuild Your Credit

A certificate of deposit (CD) is a common investment tool sold by banks. People purchase these because they are safe and certain, but there is another reason you might want to consider buying a CD. You can purchase a CD as one method of rebuilding your credit. If you currently have poor or fair credit and want to boost your score, here are several things you should know about completing this goal with a CD.

What is a CD?

If you have never purchased a CD before, you may wonder what it is. A CD is an investment you purchase for a certain amount, such as $500 or $1,000. When you buy it, you agree to leave your money on deposit with the lender for a certain amount of time, such as one year. In return, the bank agrees to pay you a certain rate of interest for the money.

The rate the bank pays is usually relatively low; however, this type of investment is guaranteed by the FDIC. In other words, it has no risks. You will get the full amount of money back that you had invested in the CD as well as the interest they agree to pay you.

How will this help improve a person's credit?

Purchasing a CD alone will not help you rebuild credit, but it will open the door for you to obtain a personal loan from the bank that sold you the CD. This type of loan is called a CD-secured personal loan, and you may be able to borrow up to 80% to 95% of the CD value.

When you take this type of loan, you will be required to make payments. As you make the payments on the loan, the lender will report your payment history to the credit bureaus. If you make all your payments on time, this will add positive information to your credit report, which is likely to cause your score to increase.

How does payment history affect your credit score?

Your credit score is made up of numerous things, but 35% of your score is based on your payment history. Adding positive payment history to your score will only offer positive effects, and this is a simple way to begin boosting your score.

There are many ways to boost your credit score, but choosing to use a CD-backed personal loan is one of the easiest and most beneficial options you have. To learn more about CDs and CD-backed loans, contact a bank that offers CDs.