7 Credit Card Myths—Busted!
Who hasn’t caught an episode of MythBusters on the Discovery Channel? It’s an entertaining production focused on debunking urban myths in a tongue-in-cheek style. Myths arise about many of life’s experiences and that includes the ubiquitous credit card. Today, we will look at seven common myths regarding credit cards, and then we’ll debunk them.
Separating Fact from Fiction
Myth # 1—My credit card has no limit
No such thing! Every credit card has a limit. Your card issuer just doesn’t reveal what that limit is. This gives you the illusion of being special. Sooner or later, you will bump up on that limit. I can only hope it doesn’t happen when you are picking up the tab for dinner with your boss…
Myth # 2—Opening a new credit card will lower my credit score
Actually, it may help! Credit scores, in part, are based on credit utilization. Just opening a new credit card increases the overall amount of credit available to you. If you don’t use the card, this has the effect of reducing the percentage of utilization, which helps your credit score.
Myth # 3—Refusing a credit limit increase will damage my credit score
It just ain’t so! Credit card issuers like to make more credit available to good customers and the offer is a compliment. Declining to accept the offer is of zero consequence to your credit score. Not to get too far into the weeds here, but a limit increase reduces your percentage of utilization, and that is a positive thing for your credit score … provided you don’t use all of the additional available credit.
Myth # 4—Canceling some of my credit cards will improve my credit score
Where did this come from!? Again, we are talking about credit utilization ratios. Canceling cards reduces your available credit relative to your existing balances. This raises your credit utilization percentage which damages your credit score. Don’t do it!
Myth # 5—My limit is “X” … so I must be able to afford it
Credit card issuers have no crystal ball and no moral imperative to look out for your best interests. Credit limits are set based on scores, debt-to-income ratios and other factors. By simply granting a limit of “X” the credit card issuer is not making the assertion that you can afford it. While it is true that they try to establish limits leading to favorable repayment outcomes, they don’t know you and they cannot foresee what financial crises may pop up in your life.
Myth # 6—I’m pre-approved for this card … so I am guaranteed to receive it
Really? I don’t think so! This is a marketing ploy and often a cruel one. Pre-approved should be changed to read pre-screened. All that means is that you have been selected as a likely candidate to apply for the credit card. You will still need to meet the credit standards of the card issuer before you ever swipe that plastic.
Myth # 7—Entering my PIN backwards at the ATM alerts the “popo” to a robbery
No clue how this got started, but it is patently false. Think about it … people have PINs such as 7007, 1111 and other numerical palindromes. If this myth were true, these people would all be behind bars for falsely reporting a crime … duh!
This Has Been Fun…
So here are three more myths, just for grins.
Bonus Myth # 1—Pre-paid and debit cards help my credit score
If it were only true! But it isn’t. Pre-paid card issuers do not report to the credit reporting agencies, and why should they? You are spending your own money, not borrowed money. The same is true with debit cards.
Bonus Myth # 2—You shouldn’t borrow from one card to pay another
Robbing Peter to pay Paul is not always a bad thing. If you find yourself in a temporary financial squeeze, it is okay to borrow from another card to make the payment. Skipping a payment or being late on a payment can really hurt your credit score. Isn’t a balance transfer the same as using one card to pay another? We do that all the time!
Bonus Myth # 3—There is nothing wrong with making the minimum payment
Yes …and no! It’s okay if you are in a bind and can’t pay more, but it should not be something that you practice regularly. Paying only the minimum will barely cover the interest on the account and principal reductions are tiny!
What about You?
Did you believe any of these myths in the past? Have we missed any myths that you would like debunked? Let us know!