Does a CD Build Credit? What to Do Instead

A Certificate of Deposit (CD) is a savings product where you deposit a fixed sum of money for a set period, earning a fixed interest rate. While CDs offer a secure way to save money, they do not help build credit. A credit score, a numerical summary of your creditworthiness, is influenced by your borrowing and repayment behavior, which is fundamentally different from how a CD operates.

Understanding Certificates of Deposit

A Certificate of Deposit (CD) is a type of savings account offered by banks and credit unions. It holds a fixed amount of money for a specific term, such as six months, one year, or five years. The financial institution pays interest, typically at a fixed rate, and your principal deposit is returned at the end of the term, known as the maturity date, along with the earned interest. CDs are generally considered low-risk savings options, as deposits at federally insured institutions are typically insured up to a maximum legal limit per depositor, per institution. However, withdrawing funds before the maturity date usually incurs a penalty, which can reduce the interest earned or even dip into the principal. Unlike checking or regular savings accounts, CDs are designed for money you do not need immediate access to, prioritizing a predictable return over liquidity.

Understanding Credit and Credit Scores

Credit refers to your ability to borrow money or access goods and services with the expectation of repayment. A credit score is a three-digit number that summarizes your creditworthiness, indicating how likely you are to repay borrowed funds. Lenders use this score to assess risk when you apply for loans, credit cards, mortgages, or even for renting an apartment. A higher score often leads to better interest rates and more favorable loan terms. Credit scores are built upon several factors reported to credit bureaus. Payment history, which tracks whether you pay bills on time, is the most significant component. Other factors include credit utilization, the amount of credit you are using compared to your available credit, and the length of your credit history. The types of credit you use and any new credit applications also play a role in the calculation of your score.

Why Certificates of Deposit Don’t Build Credit

Certificates of Deposit do not build credit because they are savings vehicles, not borrowing instruments. When you open a CD, you deposit your own money with a financial institution, rather than borrowing funds to repay. This means there is no debt, no repayment schedule, and no payment activity to report to credit bureaus. Credit bureaus track your ability to manage borrowed money and make consistent, on-time repayments. Since a CD involves no borrowing, there is no activity to be recorded on your credit report that contributes to your credit score.

Strategies for Building Credit

Since CDs do not build credit, exploring alternative financial tools can be beneficial:

Secured credit cards require a cash deposit that acts as your credit limit. Responsible usage, including on-time payments and low credit utilization, is reported to credit bureaus, helping establish or improve your credit history.
Credit-builder loans involve a financial institution lending a small amount, held in a locked account while you make regular payments. Once repaid, you receive the funds, and consistent payments are reported to credit bureaus.
Becoming an authorized user on a trusted individual’s credit card can help. The primary cardholder’s positive payment history and low utilization may appear on your credit report. However, if the primary user mismanages the account, it could negatively affect your score.
Some services allow reporting of regular bill payments, such as rent or utilities, to credit bureaus, which can contribute to your credit history.