Does Opening a CD Hurt Your Credit?
Safe and secure — the two words most associated with CDs, or certificates of deposit. While the biggest hits to your credit score come from financial oversights like missing payments, having too much debt and declaring bankruptcy, opening a new CD will generate an inquiry which has the potential to hurt your credit score.
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Certificates of Deposit (CDs)
CDs are lump-sum, set-term deposit accounts offered by banks and credit unions that provide guaranteed rates of return that are often significantly higher than those found in savings accounts. They have become increasingly popular since the Federal Reserve began raising its rates more frequently over the past few years. However, they are investments, not transactional savings accounts.
CDs normally don’t have monthly fees or minimum balance requirements but will often specify a minimum amount required to open one. They are a good vehicle for strict term savers comfortable with having their money locked in for a specified amount of time and knowing it will be insured. CDs come with penalties if you need to access funds before the certificate’s maturity date.
What Is a Hard Inquiry?
Checking your own credit report or using a credit monitoring service is considered a “soft” inquiry on your credit history. It gets recorded but doesn’t affect your credit score. A hard inquiry, on the other hand, results when a third party company or lender makes a request to review your credit file as part of a loan application — or as part of the opening of an account or CD (existing CDs and other assets don’t affect your credit score).
A hard inquiry is recorded on your credit history and normally results in a loss of credit points. According to Equifax, hard inquiries (or “hard pulls”) mark the times when you have applied for new credit and can stay on your credit report for two years (although they normally only affect your credit for one year). Typically a hard credit inquiry results in a 10% hit to your credit score, per Credit.com. As Experian noted, this usually equates to a decrease of 5 to 10 points on your credit score (less, if you have a strong credit history).
Can Opening a CD Hurt My Credit?
Losing a small amount of credit points and having a hard pull on your credit record is typically not a big deal. But, according to Credit.com, there are a couple of instances when credit inquiries could cause inconvenient damage to your report. There are also a couple of things you can do to avoid a hard pull when opening a CD.
While multiple hard inquiries for new financing applications occurring within a short time frame are considered one hard pull (like comparison shopping for a car loan or mortgage), applying for a variety of credit over a longer period of time (depending on the institution or company, from 14 to 45 days, per Equifax), can trigger multiple hard inquiries, and multiple score drops, on your credit report.
Additionally, if you’re on the bubble between a “very good” and “good” FICO score (the standard creditworthy measure for an individual based on their credit report), a point drop, even a small one, could drop you into the lower score category. If you need a “very good” FICO score for a mortgage approval (740 to 799), the hard pull from opening a CD might hurt your chances of getting it.
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However, most, but not all, banks perform hard pulls on CD applications. In general, credit unions and banks don’t want to turn away potential customers for wanting to invest in their products. As Credit.com suggested, there’s no harm asking if a financial institution automatically performs a hard pull when client opens a CD and, if so, if it would consider doing a soft pull instead for your CD transaction. If a financial institution is taking a hard stance on hard pulls, simply look elsewhere.
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