What is the optimal security deposit amount and utilization pattern to build credit history with a secured credit card?

Question

The DiscoverIt secured credit card seems to be recommended by many sources. It has a credit limit of $2500. I read the thread at Will a higher security deposit build credit faster with a secured card? and am still not clear on the best security deposit amount and utilization to build credit quickly.

NOTE: Unlike the above thread, the person's ability to afford the maximum security deposit isn't at issue. The issue is more avoiding taking $2500 from an investment account and tying it up for 6 months or longer if $1000 would work just as well.

Here are my subquestions:

(1) With the maximum security deposit of $2500, 30% would be $750 if the oft-cited target is 30% utilization. But I'm confused about whether the utilization should be the smallest nonzero amount possible, or whether using up to 30% would do more to build credit. I don't understand how barely using the card at all would build a credit score, nor how using the full amount and paying it immediately hurts credit.

(2) Is there a scenario where a $1000 deposit would be just as beneficial for building credit as a $2500 deposit?

(3) Are several small purchases each month better than one large $750 purchase?

(4) Would using $2500 for partial payment on a car (with the rest paid in cash) and paying the $2500 immediately help or hurt the credit score?

Thanks very much for your time and expertise.

EDIT: Deleted question 5 after receiving an answer from Discover.

Answer 1

The way credit scoring works is not publicly known. There are several different algorithms and scoring methods, and each agency uses their own, and sometimes different algorithms depending on what product the user purchased (user being the potential creditor evaluating your credit worthiness, not you - you're the product).

The general advice is to not use more than 30% of your credit limit, but what it means in practice is that your statement balance should not be more than that. Statement balance is what you owe and what is being reported to the credit agencies.

It doesn't matter if you accumulate the balance with multiple small purchases or a single large one. It doesn't matter if you prepay some of the balance before the statement closes. These things are not being reported.

Now, not more than 30% doesn't mean exactly 30%. Whether having non-zero balance is better than having zero balance in that regard - I don't know.

Discover is absolutely not the only bank allowing secured credit cards - any bank has them. If you're not happy with the terms you're getting at Discover - shop around. From what I could gather from their website, they allow deposits as low as $200. And yes, your deposit is your credit line, so you will know what your credit limit is from the start.

Answer 2

(5) Does the DiscoverIt card (or other secured cards) offer a range of credit limits up to $2500? Or does everyone who is approved receive the same limit of $2500? That would condition the amount of the security deposit. You wouldn't make a $2500 deposit if your credit limit is $1000. It's unclear at what point you're told what your limit is, since it's necessary to select a deposit amount to finalize your application. Apparently it's not possible to add to your deposit once you've selected an amount. So this choice needs to be considered carefully.

Quoting from the discover card website:

(1) Minimum Security Deposit: If approved, you must make a minimum security deposit of $200 (or more, in increments of $100 up to $2,500), which will equal your requested credit limit. Discover will determine your maximum credit limit by your income and ability to pay.

That means you apply. If they approve it they tell you the maximum size of the credit line. You then decide on a number between $200 and $2,500 that doesn't exceed the maximum they will allow.

(4) Would using $2500 for partial payment on a car (with the rest paid in cash) and paying the $2500 immediately help or hurt the credit score?

Most auto dealers want to avoid having customers use their credit card for some or all of the purchase. They want to avoid the fee. If they can they will push the responsibility for the fee onto the customer.

Regarding the how long the deposit will be tied up.

Getting your deposit back: Monthly reviews start your seventh month as a customer. We will refund your security deposit if you have made all payments on time for the last six consecutive billing cycles on all your Discover accounts including any loans, and you've remained in "good status" on all credit accounts you are responsible for whether they are Discover accounts or not. "Good status" means: (1) your credit report shows no delinquencies, charge-offs, repossessions, or bankruptcies for the six months prior to our review; and (2) your Discover secured card is not in a prohibited status at the time of our review, including, but not limited to: closed, revoked, suspended, subject to tax levy, garnishment, deceased, lost/stolen, or fraud. Monthly reviews may be delayed if you change your payment due date. We typically process your refund in 2-3 business days based on your delivery preference. If you close your account and pay in full, we'll return your deposit within two billing cycles plus ten days.

It sounds like if you use it wisely, you can get a non-secured card in about 7 months. At this point your score doesn't matter. It should be no worse than when you applied. Once you get a non-secured card then you will get your money back and start to build your score.

Answer 3

After a lot of research turned up contradictory opinions, I was finally able to talk to a knowledgeable person---a mortgage loan officer who evaluates credit on a daily basis. Below is what he told me. I'm answering my own question to help others with the same question.

His main point was that credit needs to be used in order to increase your credit score. Having a small amount of credit, like $500 and only using 3% of it isn't going to increase your score very quickly or demonstrate credit worthiness for a major loan. He said that although 30% to 50% utilization is OK, 10% to 20% is better. If your credit limit is $500 and you only use 10% of it, that's only $50 a month. Based on his advice, I made a down payment of $2000. I plan to use the card for groceries ($280 a month) and gas ($120 a month). That's $400 a month, for 20% utilization.

Answer to my main question: What is the optimal security deposit amount and utilization pattern to build credit history with a secured credit card? The optimal amount is as much as you can afford. The optimal utilization is 10% to 20%.

Answers to my subquestions: (1) Should the utilization should be the smallest nonzero amount possible? No. It should be 10%-20%.

(2) Is there a scenario where a $1000 deposit would be just as beneficial for building credit as a $2500 deposit? No. The higher the available credit, the higher the credit score.

(3) Are several small purchases each month better than one large $750 purchase? No. The number of purchases is irrelevant.

(4) Would using $2500 for partial payment on a car (with the rest paid in cash) and paying the $2500 immediately help or hurt the credit score? I'm not sure about this one. I think that paying the $2500 before the reporting date would not affect the credit score. I think that paying the $2500 after receiving the monthly bill would damage your credit score because it would be 100% utilization.