Certificates of Deposit (CDs) can be a useful part of your investment portfolio – but did you know that opening a CD at some banks and credit unions can drop your credit score? It's possible, depending on how your bank or credit union assesses risk.
When you apply for credit, lenders check your credit report to assess the risk in lending you money. These credit checks, called hard pulls, drop your credit score slightly. A typical hard pull drops your credit score by around five points and can remain on your credit report for up to two years. You can check your credit score and read your credit report for free within minutes by joining MoneyTips.
Creditors use a different and less-extensive credit check – a soft pull – when they are reviewing your credit to decide whether to send you an unsolicited loan or credit card offer. (Checking your own credit also results in a soft pull.)
Soft pulls don't affect your credit score at all because they just show an exploratory interest in credit. Hard pulls show you're serious about credit because you've filled out an application. Too many applications for credit in a short time tells creditors you need significantly more credit – and that you're at a greater risk for not making payments.
"One of the top myths I hear about credit scores is that if you look at your credit score, it's going to hurt. It does not hurt at all to look at your credit score. You can look at it twenty times a day and it won't affect your score at all. That's what's called a soft inquiry," says personal finance expert and author Jordan Goodman. "What does hurt your credit score is a hard inquiry where in fact you are applying for credit. And you don't want to do a bunch of those at the same time."
Typically, requests for loans within a two-week window only count as one hard pull, but that's generally not the case with credit cards. (You wouldn't buy two houses and probably not two cars at the same time, but you might open two credit card accounts.)
CDs aren't a form of credit – you're entering money into an account instead of borrowing money – so why does opening a CD affect your credit score? Logically, it shouldn't. However, it's the policy of some banks and credit unions to do a more extensive hard credit pull before letting you open a CD or set up another deposit account.
Financial institutions probably won't volunteer whether they use soft or hard pulls to evaluate new account requests, but you have the right to ask. Before opening a CD with your bank or credit union, ask if they do a hard credit pull to approve new CDs or deposit accounts.
If hard pulls are a standard policy, ask for a soft pull instead. Financial institutions are in serious competition for your business, so your bank or credit union may grant your request – especially if you're already a customer with other accounts in good standing.
If your bank or credit union does hard pulls and won't allow exceptions, consider opening a CD at a different financial institution that doesn't require a hard pull. You can also decide that you're satisfied enough with your current institution to live with a five-point credit score drop.
How do you know if you can handle a five-point drop? Check your credit score regularly to see if you are on the edge of a credit score boundary. You might reconsider your CD choice if you're on the lower end of a range and know that you'll need another line of credit soon, such as a mortgage or an auto loan.
Review your CD options – but don't worry too much about the effect on your credit score. You should be fine as long as you keep hard credit pulls to a minimum and use credit wisely. You're better off focusing on the more important factors in a high credit score, like making all payments on time and keeping debt well below your credit limit. Don't forget to check your credit score regularly to track your progress.
You can check your credit score and read your credit report for free within minutes by joining MoneyTips.