Money Matters - Simplified

Top 5 Credit Card Myths

Credit card myths can cost you money and affect your credit rating. Here are the five biggest myths.
Don’t be fooled with the merchant displaying a board – “Minimum credit card purchase $10”; you have the right to charge your card even for a penny

Credit card issuers generally do not disclose much information about their product. There are many myths about credit cards in the market, and believing in one can cost you dearly. The best thing to do? Know these myths and get wiser.

Tips to Improve Your Credit Score

Pay your bills on time: If your credit history reflects that you pay your credit card bills on time without any default payment, your credit score will improve substantially.

Don’t utilize all your credit limit: It is recommended that you should not utilize your credit limit lower that 30 percent to improve your credit score. So you should first pay down the cards that are nearing the credit limit.

Never ask the creditor to lower your credit limit: Asking you creditor to lower the limit will reduce the gap between the balance and the available credit and thus lower your credit score.

Don’t apply for a new card if you have plenty: Applying for a new credit card if you already have plenty can lower your credit rating. It is always wiser to apply for a loan to help you out of the financial crunch.

Here are top five credit card myths you should be aware of:

Myth No. 1: Some credit cards have no credit limit.
You must be aware of the popular tagline advertised by American Express - "No present spending limit”. However, all credit cards come with a credit limit.

This tagline is more of a marketing gimmick. It does not mean that anybody who owns an AmEx card can shop for a sports car worth $250,000. This tagline comes with an asterisk sign which further reads -- “... does not mean unlimited spending. Your purchases are approved based on a variety of factors, including current spending patterns, your payment history, credit record and financial resources known to us”.

The credit limit on AmEx cards is dynamic. It means that if your credit history reveals that you make purchases of small amount on your card and one fine day you make a purchase for a large amount, your card can be declined by the issuer. Therefore, it is always wiser to make a call before making any such transaction.

Myth No. 2: A credit card company can't change the interest rate until you get a bad credit rating.
You have been paying credit card bills on time or your usage is much below the credit limit. However, the interest rate doubles in your next credit bill and you are surprised about what went wrong. The fact is that credit card companies can change the rates at 15 days of notice.

This privilege enjoyed by the credit card companies will be ending in July 2010 though as the federal regulations will ban hike in interest rate, with certain exceptions, on the existing balances.

Myth No. 3: It is necessary for merchants to ask for your Identification card when you pay through a credit card.
You made a purchase of $3000 at a local store and the merchant charges your credit card without checking whether you are the same person who owns the card. However, the fact is that the Merchant’s agreement with the credit card companies forbids them from asking any kind of identification.

Even organizations like American Express and Discover discourages this practice. So don’t be surprised at the merchant’s behavior as your signature is enough for him.

Myth No.4: Merchants can set a minimum amount for a transaction on your credit card purchase.
All the credit card companies charge the merchant a minimum amount of 2 percent of the sale in addition to the transaction fee. So if you buy a soap for $3 and decide to pay using your credit card the merchant might not earn much in the transaction.

Therefore, most of the times you will see the merchant displaying a board –“Minimum credit card purchase $10”. The fact is that in order to save money the merchant is discouraging small sales, which is against the agreement with the credit card companies.

You have the right to charge your card even for a penny. You can inform the credit card company regarding the practice and they will certainly do something about it.

Myth No.5: You can improve your credit rating by paying more than you owe.
The total amount due in your credit account is $200 and you make a payment of $500. This practice will temporarily raise the credit limit in your account. It is, however, recommended to keep a certain amount due in your account for better credit rating. The fact is having below zero balance in your credit account will still reflect a zero balance for the rating purpose.

These are not the only credit card myths. There are a lot more. It’s a good idea to let some of your friends and family know these myths now and ask some credit card revelations from them, if they have any. Shared knowledge can get you far.

This story was originally published on 31/07/2009.