Big Foot and Elvis may not exist, but these made-up stories about credit cards never seem to go away.
This guest post was written by Odysseas Papadimitriou, CEO of CardHub.com.
Big Foot and the Loch Ness Monster roam the wild. Aliens crashed at Area 51. Tupac and Elvis are alive and well, recording and releasing music.
There’s no shortage of myths and wild beliefs out there, and while these tall tales are fun to consider, they generally don’t impact day-to-day life. This isn’t the case for myths about credit card use, however.
These myths are typically less outlandish, meaning that they are more likely to be taken as fact – and negatively impact people’s finances. Therefore, busting credit card myths is a must. So here’s the truth behind the greatest credit card myths…
Myth No. 1
Your small business’ credit standing dictates what business credit card you qualify for.
Have you ever stopped to think about why you’re required to provide your Social Security number when applying for a business credit card? Because a small business owner is personally liable for misuse of the card. Since liability is not limited to your business, the key consideration when it comes to business credit cards for new businesses is your own credit score.
Myth No. 2
Leaving a small balance each month helps your FICO score and increases the likelihood that your credit card company will give you a higher credit limit.
Some people believe that by paying their balances in full each month, they’re taking away interest revenue from their issuers and are thereby displeasing them. These people maintain a small balance, thinking that this will help them get in their credit card companies’ good graces – and in turn receive higher credit limits and an improved credit score.
Not the case, as banks make credit limit determinations based on your credit history – not as a result of making a few extra bucks off you each month.
Myth No. 3
Some credit cards allow unlimited spending.
Many people believe that certain credit cards allow users to spend without credit limits. Every credit card has a limit, but there’s a good reason for the existence of the myth.
Some of the most popular credit cards for excellent credit are the Visa Signature credit card, the World MasterCard credit card, and American Express charge cards – because they have the “no preset spending limit” (NPSL) feature. Consumers clamor to open NPSL cards because they think such cards are limitless – and they feel like exclusive, preferred customers who are trusted by their banks so much that spending limits have become unnecessary. But what NPSL really means is that these cards’ limits fluctuate month to month.
This popular misconception is lucrative for issuers because it attracts a lot of consumers, and as a result, credit card companies actually perpetuate it by choosing not to release their NPSL cards’ limits to users or the major credit bureaus.
This increases the likelihood of a user’s card being declined unexpectedly and this person’s credit being affected unpredictably. Therefore, the myth of the limitless credit card can actually have serious repercussions for those who believe it.
Myth No. 4
My credit card will only benefit my credit score if I use it.
Your credit card has the potential to help improve your credit score because information about consumer credit card use is reported to the major credit bureaus on a monthly basis. If this information is positive, it can either establish a track record of responsible use for the inexperienced credit user or mitigate the impact of previous missteps for the consumer who misused credit in the past.
Many people believe that this positive information only results from using a credit card and paying for purchases responsibly. They wonder how doing nothing could be construed as responsible use. Don’t you actually have to use a credit card to use it responsibly?
Well, no. Responsible use is exhibited both by what you choose to do with your credit card and by what you choose not to do with it. By simply maintaining an open credit card at zero balance, you are effectively choosing not to use your available credit – a choice that lenders and FICO alike believe to be utterly wise. Still, though leaving your credit card unused can benefit your credit score, you will get an additional boost by making purchases from time to time and paying for them in full.
Myth No. 5
Debit cards provide greater fraud protection than do credit cards.
Credit cards and debit cards provide the exact same level of security against fraud. Interestingly, credit cards actually make fraud simpler to deal with as well.
If someone racks up unauthorized charges on your credit card, you’ll notice them on your bill before making a payment, dispute them, and quickly resolve the situation.
But if someone uses your debit card, the money will be removed immediately and you may not notice that it’s missing before writing checks. Thus, with a debit card you might not only have to resolve the fraud issue, but you could also have to deal with a bunch of bounced checks.
Myth No. 6
The clock on how long negative information stays on your credit report resets at the time you make a payment.
Information about credit card delinquency and/or charge-offs stays on your credit reports for seven years. The clock begins to roll when you first become delinquent, and contrary to popular belief, this time does not reset once payments are made.
Many people refrain from making their payments until the seven years have concluded, thinking that this will minimize both the amount of time negative information stays on their credit reports and the impact this information will have on their credit. This is not the case, however, because negative information about debt stays on your credit reports for a fixed amount of time no matter what you do.