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I am helping a new immigrant to the US who has no credit history build credit, so they can get a mortgage for a home. Citibank recommended the Citibank Secured Mastercard, which allows a security deposit of $200-$2500, but that money can't be given back for 18 months.

They think only $1000 is enough for monthly expenses, but would credit build faster the security is higher, such as the maximum $2500?

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    FYI Citi's secured card offering is rather mediocre. Discover's secured card is considered the best available -- it actually offers a rewards program and you can "graduate" to an unsecured account (get your deposit back) as early as 8 months. – josh3736 Jun 26 at 1:23
  • It's worth shopping local credit unions, too. They will often be more interested in someone's financial progress than a large bank, yet their products will probably not show up in a survey of the "best" products so they may fly under radar for some people. – dwizum Jun 26 at 12:00
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Getting, and using, a credit card will have many impacts on your credit score. It can be helpful to understand how all of them work, even though you're (indirectly) only really asking about one of them.

  • average age of credit - the longer your accounts have been open, the higher your score in this category. Lenders like to see that you've had credit open for a long time, versus someone who has accounts that are only a few months old.

  • credit type mix If you have no other credit cards, opening a card will improve your mix (the ratio of different types of credit you have, i.e. installment loans vs credit cards). If the credit card is your only account, this factor will be poor, but better than nothing.

  • Your score will dip a few points when you open the account, since the bank will do a hard pull of your report in order to approve you for the account. This is inevitable, and the only thing you can do is wait.

  • Most importantly, your score will be based on a number of factors related to how you use the credit. For instance, if you miss a payment or make one significantly late, your score will drop significantly, and the effect will last many years. The other major use-factor for credit cards is utilization which is the main topic your question is addressing, although rather indirectly.

Utilization is the ratio between the balance on your account and the limit on your account. It is reported by your bank, once per month, as part of the data they submit to credit bureaus. The only thing that matters is the balance and the limit on the day they make their report.

In other words, if you have a $1,000 limit, and you carry a $999 balance for 29 days, and then you pay it off the day before they report your account, your utilization will be zero. You can, immediately, the very next day, go charge it right back up to $999 and leave it that way and the credit bureaus won't know or care. This is relevant because you can effectively "game the system" by making sure you always pay your balance down a few days before your bank reports your account (you can determine the schedule for that by asking them, or looking at the "last updated" date on your credit report for that account).

The other important factor about utilization is that it is memoryless. In other words, at any point in time, all that matters is your most recently reported utilization. You could go for 10 years with the utilization at 100%, and then pay it off one day, and your score will suddenly jump upwards as if those ten years at 100% had never happened. And then, you can go and charge your card back up to 100% utilization the next month, before the reporting date, and your score will drop right back down to the exact same number it was before it jumped up.

The memoryless aspect is important because, again, it lets you "game the system." Use your card as appropriate, and if you get to the point where you know you are going to apply for credit soon (i.e. take out a mortgage) then, for a few months prior, make sure you pay your balance down and don't leave a big balance on the card on the reporting date.

Finally, on the subject of utilization, if you really want to maximize every point possible on your score, you should leave a few dollars on the card as of the reporting date. A utilization of zero is not bad but a very low utilization of a few percent actually gives a slightly higher boost to your score. This is because people who let rotating credit accounts (like credit cards) sit at zero percent are actually ever-so-slightly slightly more likely to default than those who actively use their cards.

To bring this back around to your question, you asked what amount your friend should put on the loan to secure it (which is important because it determines the limit). The best answer to this is, pick the amount they think they can safely manage, and then get in the habit of paying the balance down every month.

This may seem like an indirect and long winded answer to your question, but people sometimes (falsely) try to choose a limit based on how much they think they'll need to spend in a month with a target utilization in mind - they'll think, I need $1,000 a month and I want a 10% utilization so I'll ask for a $10,000 limit. But that's false logic, based on the above explanation - basically, no one cares what your balance does throughout the month, only what your balance is on the day your info is reported. So if you need to put $1,000 through the card in a month, you could do so with a $1,000 limit, and just pay it down before the reporting date. Heck, you could even do it with a $500 limit, as long as any individual purchases weren't over $500 - just pay it off immediately every time you use it.

To make a long story short, choose a limit based on what you think you can manage. If you really want to build your credit history, focus the most effort on learning and practice good credit habits - don't carry a balance, keep an eye on how you use your card to avoid impulse purchases, pay it off in time each month. Then, if or when you are going to apply for a big loan or take another step in life where you want the best score possible, make sure the balance is paid down close to zero prior to your bank's reporting date

  • By the way, secured cards often do not do a credit pull. So you may not take that hit. Because they are not a true credit instrument. – Vality Jun 25 at 17:18
  • I guess your definition of "often" is a little ambiguous. At any rate, it will vary depending on the product and the institution, and potentially the location. A true secured credit card is a credit instrument - it's just secured, and is is no different than any other secured loan (i.e. a car loan or mortgage). The security deposit is placed in a separate savings account and isn't in any way affected by transactions on the account. – dwizum Jun 25 at 18:35
  • You are correct, I just thought that was a useful tidbit of information the OP may be find useful if they are trying to boost their rating as much as possible. – Vality Jun 25 at 19:01
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While using almost your whole limit each month will lower your credit rating. This has no "persistence". So if you make sure not to use the card for the month or so before applying for other credit this will not matter.

Most of these secured credit cards are very poor deals so I would only suggest keeping one for 6 months or a little more until you have some kind of score and can get a real card with no regular fees and which does not require such a deposit. (It generally only takes 6-12 months to get a credit rating from nothing if you have an SSN so forcing you to keep the card for 18 is a bit of a trick and I would suggest looking into a different bank's secured card, many of which have no minimum term.)

As a source I am also an immigrant and used a secured card (specifically a Wells Fargo one) to establish a credit record. I only deposited about $500 but just didn't use the card, this kept my utilization at 0 and so didn't matter for the purposes of rating.

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If $1,000 is enough for monthly expenses, but they are using almost all of that each month, the debt to credit ratio will be too high and negatively impact the credit score. I would recommend shooting for as much as they can afford to keep the utilization under 30%.

  • Does that mean, if $2500 is the amount of the card, try to only spend 30% ($750) on that card every month? Or does that mean leave a balance of $750 due every month? – Village Jun 25 at 16:22
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    It's never good to leave a balance on a credit card, that's how you end up paying interest. Spending $750 a month on a $2,500 card would keep the utilization at the top of the recommended range of under 30%. Definitely want to pay that off each month. – hot pineapple juice Jun 25 at 16:30

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