A certificate of deposit (CD) is a financial product that is similar to a typical savings account, and is offered by banks, credit unions and other financial institutions. The Federal Deposit Insurance Corp. (FDIC) and the National Credit Union Association (NCUA) are organizations that insure CDs, making these types of investments practically risk free. Unlike normal savings accounts, CDs have a fixed term of usually one, three, six or 12 months, though some may have up to a 10-year term. Also, CDs typically have a fixed rate of interest attached to them.
Using a CD to Build Credit
Since CDs are fixed-term deposits an investor gives to a bank for a fixed rate of return, an investor can use CDs to build or strengthen his credit history. Minimum investments for CDs are usually $1,000. The institution issuing the CD typically allows the investor to borrow up to 95% of the investment's value shortly after opening the account, to be used as collateral in case of default.
Banks or credit unions generally, but not always, report this type of loan to the credit bureaus as a secured installment loan. Thus, it is wise to confirm with the institution that the reporting is occurring. Making punctual payments on this loan increases a person's credit score over time, and the process can be repeated indefinitely. CDs are completely secured, such that the institution involved rarely refuses to make this type of loan, and for this reason they are an excellent option for someone trying to build or repair a poor credit score.