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7 credit card myths debunked

They sound sensible, but acting on them can cost you

By John Morell

7 credit card myths debunked Rob Goebel, Lana Kotioukova/CreditCards.com

 

7 credit card myths debunked Rob Goebel, Lana Kotioukova/CreditCards.com

 

We've all heard some of them, and we've probably believed more than a few, but living by a credit card myth can cost you a lot of money in fees and hurt your credit rating.

Here are seven of the most pervasive credit card myths to watch out for:

Myth No. 1: Writing 'See ID' on the signature line on the back of your cards will stop a credit card thief cold and absolve you of any liability if a thief uses it.

The Logic: The "Ask for ID" or "See ID" prompt reminds salespeople to confirm that the name on the credit card matches that of the person holding it. But, more often it is the customer who is swiping or dipping their cards directly into terminals these days without a cashier even looking at it.

The Reality: An unsigned credit card is invalid, technically, according to the agreements that card issuers have with retailers.

If you do give a clerk an unsigned card or one with "See ID" written instead, they're supposed to have you sign the back of the card and check the signature against your driver's license or passport. This may trip up a fraudster a bit -- after all, a thief is unlikely to be able to mimic your signature on command -- but that's only if the cashier bothers to take the time to compare that signature to the one on the driver's license.

So what about the liability issue? Does writing "See ID" absolve you if the card is taken and used? No, because when a card is stolen, cardholders are still liable for up to $50 of the fraudulent amount charged, although most issuers now offer zero liability for fraud or theft.

Myth No. 2: There's no credit limit on your American Express card, so you can buy anything you want.

The Logic: Years of powerful advertising from American Express have probably locked at least one of their messages in your mind: "No preset spending limit." So when the AmEx arrives in the mail, you can activate it and buy tickets to Maui -- or your own Gulfstream jet to take you there, right? After all, there's no limit on your account.

The Reality: AmEx has changed and it no longer issues only charge cards -- the type that allow you to rack up a lot of debt, as long as you pay off the entire debt every month. They issue credit cards, too, which allow you to carry a balance.

In addition, when you inspect the marketing info from American Express, the phrase "no preset spending limit" usually comes with an asterisk. In the fine print, you'll find wording to the effect that this "... does not mean unlimited spending. Purchasing power adjusts with your use of the card, your payment history, credit record and financial resources known to us, and other factors.”

"There is no preset spending limit. It's dynamic. It can change based on your financial situation and how you use the card," says Mona Hamouly, vice president of social media communications for American Express. "We have customers who make extremely large purchases with their cards, but that may be part of their profile."

Remember: All those cards with your name on it don't make you rich and powerful, and in the end, you could become poor because of them.

— Linda Sherry
Consumer Action

In other words, if you don't already make high-dollar purchases with your credit cards, expect AmEx to question why you're suddenly buying $6,500 designer shoes when you stated on your application that you earned just $30,000 a year. "The best thing to do when you're going to make a purchase that's out of the ordinary for you is call and let us know, so we can discuss the details," says Hamouly.

Myth No. 3: You need one of each of the big cards -- VisaMasterCardAmerican Express and Discover -- in your wallet because you may be stuck someplace that accepts one and not the others.

The Logic: People wonder if the place they're going will take the card(s) they have. People wonder if the place they're going will take the card(s) they have. Rivals American Express and Visa have created TV spots that perpetuate that all places are picky with what cards they take.

Some places are picky*. For example, only Visa is good at rival retailer Costco.

Some places are picky. For example, only Visa is good at rival retailer Costco, due to an exclusive partnership deal. And Discover cards still don’t enjoy universal acceptance throughout the U.S., due to slightly higher processing fees, and are not accepted in all countries like Visa and MasterCard.

The Reality: "If you have two of the big four, you're not likely to have any problems," says Linda Sherry, national priorities director for Consumer Action in Washington, D.C., "and millions of people just get by with one. It's much simpler."

"Although their advertising can make you want all these great cards, it's probably not great financial sense to have them all," says Sherry. "Remember: All those cards with your name on it don't make you rich and powerful, and in the end, you could become poor because of them."

Myth No. 4: You can give your credit score a boost by paying more than you owe.

The Logic: Paying more than you owe does temporarily bump up the amount of available credit on your card. It's also true that using a smaller percentage of the credit available in your accounts -- known in the industry as keeping a "low utilization ratio" -- helps your credit score. Lastly, it's thought that early credit scoring models may have given people a boost when they paid a personal or car loan a month early, so some may think that the same thing would apply to their plastic.

The Reality: "Even though you may be below zero on an account, it's assumed that's a temporary situation," says Roslyn Whitehurst, a spokeswoman with the credit bureau Experian. "Whether you've got a credit of $100 or $1,000, it still shows as a zero balance for scoring purposes."

Myth No. 5: Using your debit card wisely can help your credit score.

Whether you've got a credit of $100 or $1,000, it still shows as a zero balance for scoring purposes.

-- Roslyn Whitehurst
Experian

The Logic: Debit and credit cards look alike, both bearing Visa, MasterCard or other logos. They're treated virtually the same by retailers. Thus, both should have an impact on credit scoring.

The Reality: "Having a bank account with a debit card and maintaining it properly shows that you're a responsible consumer," says Sherry. "But it is not taken into account" in credit scores, she says.

Myth No. 6: Keeping your balance to under 30 percent of your total credit limit is good for your credit score.

The Logic: A common misconception broadcast by many financial experts is that if you keep your card balance under a third of what you are allowed to charge, the credit scoring gods will reward you for not maxing out your cards.

The Reality: While keeping a low credit utilization (the ratio between your balance and your card’s credit line) is good practice, applying a generalized 30-percent rule across the board to everyone doesn’t make sense, says credit scoring expert Barry Paperno, who has worked for both Experian and FICO. “Utilization ranges and points that apply to one person’s credit experience may not necessarily apply to a different set of experiences,” he says in a CreditCards.com column on the subject. However, Paperno suggests that keeping a small balance is better than a $0 balance, because that shows lenders you are actively using credit.

Myth No. 7: If you go over your credit limit and pay it back before the due date, you'll be fine.

The Logic: Lots of people go over their credit limits. After all, credit card companies don't want to embarrass you and lose you as a customer, so they rarely decline your purchase. As long as you're a good customer and you keep the overage reasonable, they won't hit you with an over-the-limit fee.

The Reality: It's true that credit card companies don't want to decline your purchase when you go over your limit. And if you're buying something that puts you a few dollars or more over the top, there's a good chance they'll give you the green light. But remember, every time you pass that credit limit, even for a short period, you could give the issuer a reason to boost your interest rate to penalty rate levels -- sometimes more than 30 percent.

You may have one of the few cards around these days that charges one of those nasty over-limit fees that can eat up your account. Taken over time, those fees can add up and hinder your ability to draw down your debt. "It just makes sense for the company," says Sherry. "They know you don't want to have the card declined, so they quietly penalize you the $30 or $40 over-limit fee."

To avoid it, try calling before your purchase to see if they can give you at least a little bump in your credit line.

* -  As originally published, this article stated that Sam's Club only accepted Discover and its own branded credit card. Please see CreditCards.com's corrections policy.

See related: Should you write See ID on the back of your credit cards?, When merchants break the credit card rules, Mistakes that trigger penalty rates

Updated: June 29, 2016


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Updated: 12-03-2016


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