Why common myths about credit cards exist
It is curious why so many myths surround credit cards considering that almost everyone has at least one and they've been a major source of unsecured credit lines for many years.
As complex as home mortgage loans are, people often seem to understand mortgage terms better than credit card terms.
The problem appears to be driven by the combination of the simplicity in using credit cards and the sometimes convoluted language of credit card agreements.
Credit cards: Easy to use, hard to understand?
Most of the global human population knows how to use a credit card. Present one to a merchant or provide card information for online purchases, and your product is handed or shipped to you. Quite simple, don't you think?
Contrast the simplicity of credit card usage to the interest rate and other terms explained in detail in most credit card agreements. How many of you really understand the terms of each credit card in your wallet or purse? You may be a bit "fuzzy" about your credit card agreement details, which is normal.
Many people have expressed frustration with the language, content, and term descriptions in most credit card agreements. The people have spoken and the U.S. government has listened.
Consequently, by July 2010, credit card companies must modify their agreements and disclosures to be more clear, understandable, and highlight all major terms in the document. This action should help clarify those terms that appear to generate the most myths surrounding credit cards.
You should be prepared to endure some dismay at your new-found knowledge of the credit card terms to which you have freely agreed and accepted. Unlike a fixed rate mortgage or auto loan, most (if not all) important terms in your credit card agreement can be changed at will by your lender. While this reality is not necessarily a "bad thing," it is easy to overlook changes your credit card company makes.
If they decide to reduce your interest rate, you benefit, whether or not you read their notification in your credit card statement. However, if they increase your interest rate, fees, minimum payment, or other important terms, you may experience an unpleasant surprise.
Fact or fiction?
Fixed rates
You have a fixed rate and, like a fixed rate mortgage, it can never be changed. Fiction. When is a fixed rate not a fixed rate? When it's attached to a credit card account.
While you may not experience a constant fluctuation – particularly weighted to upward movement – of your interest rate, credit card companies typically can "adjust" your fixed rate under the conditions in your agreement.
See also: How do fixed APRs and variable APRs differ?
Closing old accounts
Closing an old credit card account will improve your credit score. Fiction. In most cases, closing older credit card accounts often results in a decrease in your credit score. Should you have multiple older credit cards and decide to close just one, your score may not be damaged.
However, if you close one or two older accounts, leaving you with one or more much newer accounts, you may experience a 10% to 15% credit score decrease. This is the approximate value of losing a positive history with open credit card accounts.
See also: Should I keep old credit cards or cancel them?
Liability
If you lose your credit card (or it's stolen), you're only liable for the first $50 of fraudulent charges. Fact. If you report your lost credit card BEFORE any fraudulent charges, you are responsible for $0.
Whenever you report that your card has been lost or stolen, you are only liable to pay the first $50 if an unauthorized person uses your account. The federal Fair Credit Billing Act (FCBA), not the generosity of your credit card company, provides this protection for you.
See also: What to Do if Your Credit Card is Lost or Stolen
Maxing out credit lines
You should keep your credit card balance close to the maximum to show you can handle larger debt levels. Fiction. Your debt-to-credit-limit ratio has an effect on your credit score. Keeping your outstanding balance near the maximum drives can actually negatively affect your credit score.
Whenever possible, try to keep your outstanding balance around 30% to 40% of your spending limit. This keeps your debt to credit limit reasonable and displays that you can manage your credit line properly.
See also: Is there any harm in maxing out my credit card?
Separate fact from fiction
Managing your credit cards and their outstanding balances takes a bit of diligence, but it's worth the effort. Understanding the facts versus fictions perpetuated by these myths is equally important since good decision making is paramount in keeping your credit score high.
Read your credit card agreements carefully and ask your lender about any language or terms that appear "murky." Use the little-known ability to negotiate credit card terms that displease you. Remember, everything in your credit card agreement is negotiable.
Credit card fact or fiction series: Part I | Part II | Part III | Part IV
