Rebuilding Credit: CD/Savings Account Secured Loans
You can rebuild bad credit by getting a bank loan secured by a CD or savings account.
If you want to repair your credit and cannot get a credit card or regular loan, consider getting a bank or credit union loan secured by a certificate of deposit (CD) or savings account. By making your loan payments on-time every month, you can start building positive credit history.
(For other ways to rebuild credit, see the articles in Improving & Rebuilding Credit.)
How Do CD/Savings Account Secured Loans Work?
Start by taking some money you’ve saved and open a certificate of deposit (CD) or savings account. Then ask the credit union or bank to give you a loan against the money in your account. In exchange, you have no access to your money -- you give your passbook to the bank and the bank won’t give you an ATM card for the account -- so there’s no risk to the bank if you fail to make the payments.
If you can’t find a credit union or bank that offers these types of loans, apply for a personal loan and offer either to get a cosigner or to secure it against some collateral you own (not your house).
Questions to Ask Before You Get the Loan
No matter what kind of loan you get, be sure you know the following:
Does the credit union or bank report these loan payments to credit reporting agencies? This is key; the whole reason you take out the loan is to repair your credit. If the credit union or bank doesn’t report your payments to a credit reporting agency, there’s no reason to take out a loan.
What is the minimum deposit amount required for loans? Some banks won’t give you a loan unless you have $3,000 in an account; others will lend you money on $50. Find a credit union or bank that fits your budget.
What is the interest rate? The interest rate on the loan is usually much higher than what people with good credit pay. It will usually also be higher than the interest you earn on the money you deposit with the bank. Yes, this means you’ll lose a little money on the transaction, but it can be worth it if you’re determined to repair your credit.
What is the maximum amount you can borrow? On CD or passbook loans, credit unions and banks generally won’t lend you 100% of what’s in your account; most will lend you between 80% and 95%.
What is the repayment schedule? Credit unions and banks usually give you one to five years to repay the loan. Some banks have no minimum monthly repayment amount on passbook loans; you could pay nothing for nearly the entire loan period and then pay the entire balance in the last month. Although you can pay the loan back in only one or two payments, don’t. Pay it off over at least 12 months so that monthly installment payments appear in your credit file.
Make All Payments on Time
No matter what, do not miss a loan payment. This is extremely important: If you miss a loan payment, the bank will report the late or missed payment to a credit reporting agency, and you will have set back your efforts to repair your credit.
The majority of this article is excerpted from Credit Repair by Margaret Reiter and Robin Leonard (Nolo).