Using Certificates of Deposit to Reestablish Credit
If your credit is bad, you may not realize that you have options beyond secured credit cards to reestablish credit. Because the credit bureaus want to see a mix of revolving and installment accounts, understanding how to reestablish installment credit will help you raise your credit score.
Did you know that getting a bank loan is quite easy, provided you have cash to open a certificate of deposit to collateralize the loan?
Certificate of deposits or CDs are investment accounts in which a specific amount of money is deposited for a specific term. The rates these investments pay depend on how long you lock the money in for and in some cases how much you deposit. In other words, you will be paid a higher rate of interest if you lock your money in for five years than if you elect to have a three month term. You should always go with a shorter term is there is a chance that you will want to get the money out before the term is over. The reason for this is that most CD’s have penalties for early withdrawal that negate any interest that would be paid.
When you are opening a CD specifically for the purposes of taking out a CD loan, you will want to match the term of the CD to the term of the loan. So, if you are taking out a 12 month loan, you also want your CD to be for 12 months.
The interest rate on your loan will be low, but it will be more than the rate you are being paid in your CD. Your CD might pay 5.5% and your loan rate might be 7.5%.
If you are working with a small community bank or a credit union, you want to make sure that the company reports to the credit bureau. After all, the only purpose of this loan is to improve credit history.
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