9 big credit card myths

If, for example, you're a good customer who typically spends $3,000 to $5,000 and you want to charge a $50,000 luxury car to your card, you'd be smart to call Amex first to make sure the transaction would be approved.

If, on the other hand, you're in possession of an American Express Centurion Card, a black version that usually isn't even offered to folks who charge less than $250,000 a year, you probably needn't worry about getting approval for the same transaction -- unless "your people" forgot to pay last month's bill.

Myth No. 6: If you pay your credit cards in full and on time, you don't need to worry about your cards' effect on your scores.

Paying your balances in full is good for your wallet, and paying on time is good for your credit scores. But you can still mess up your credit even if you're diligent in doing both.

How? By using up too much of your credit limit. Your credit scores are incredibly sensitive to how much of your available credit you use, especially on your credit cards.

And the balance used for these calculations is typically the balance that shows on your most recent credit statement. So if you've charged $9,000 on a card with a $10,000 limit, your scores will reflect the fact that you're using 90% of your available credit, even if you pay off the balance the day you get the bill. Such a misstep can knock dozens of points off your scores.

How to fix this? Ask for higher limits, spread your purchases among several cards or make two payments each month -- one just before the account's statement closing date and another just before the due date. The first payment will reduce the balance that is reported to the credit bureaus and is used to calculate your credit scores. The second payment ensures your account won't be marked late, since many issuers require some kind of payment between the statement closing date and the due date, even if a payment was made earlier in the billing cycle.

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I've heard this one repeated by folks who should know better, including mortgage brokers and other lending professionals.

Here's a tip: If you're told the reason your credit scores aren't higher is because you have "too much available credit," that pretty much means you have great scores. Typically the only reason you'd hear this "negative" is because there's nothing else wrong with your credit.

You certainly shouldn't ask a credit card company to lower your credit limits or shut down cards, since either action could hurt your credit scores, unless a lender specifically requires you to do so as a condition of getting a loan. Even then, you should try to keep your oldest and highest-limit cards open.

But you also shouldn't run out and open a bunch of new credit card accounts without considering the consequences. Each new account application can ding your scores and represents another set of rates, due dates and terms you'll have to track. Apply for credit sparingly, and don't worry if your issuer rewards your good credit habits with a higher limit. It knows you can probably handle it.

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Credit card issuers lately have been vigorously disabusing customers of this notion, as I wrote in "The credit card party is officially over." Many borrowers have seen their rates double or triple even though they haven't been late with a payment or suffered any other credit setbacks.

For now, credit card companies can alter virtually any rate or term with just 15 days' notice. Their freedom to do so will be ending soon, though. In July 2010, federal regulations will kick in that ban rate increases on existing balances, except in limited circumstances, such as when a borrower skips a payment.

Myth No. 9: Rewards cards are pretty much the same.

This myth takes different forms, including "the best rebate you can get is about 1%" or "you have to pay an annual fee to get a rewards card" or "the rewards aren't worth the effort to redeem."

It's all bunk, said Arnold, of CardRatings.com. Consumers who shop around will find big differences among rewards cards. Today, the best cash-back rewards cards have no annual fee, and you should expect a rebate in excess of 1%. Check out "20 credit cards that pay you back" for some insight on what you may be missing.

Updated Nov. 18, 2009

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