A misunderstanding between friends can lead to hurt feelings and strained relations. A misunderstanding regarding the way your credit card works could cost you money, leave you vulnerable to identity thieves, and hurt your credit score.

A rumor is like an avalanche. It starts as a little piece of misinformation about the size of a snowflake, and gathers the destructive power of an avalanche of snow as it passes from person to person. The rumor-mill applies to the financial world, as well, especially regarding credit cards. Beware of these common misunderstandings.

  1. Credit card companies can't change your rate: This may be less a rumor and more wishful thinking. The sad truth is that credit card companies can change your rate anytime, anywhere. They exercise this power not necessarily because they're mean and nasty people, but because you've had some sort of financial misstep-like a late payment or a large balance-that makes you a financial risk. Legislators are looking to flex their own muscles and require credit card companies to offer more of a fixed rate.
  2. Your signature on the back of the card: On the back of a credit card is a little white box reserved for your John Hancock. The function of this signature box is extremely important: It's the only form of ID a credit card company requires when you make a purchase. If a merchant asks for an ID, you have the right to refuse. In fact, you should immediately go on the defensive. The inquiry may be the act of an identity thief on the prowl who's looking to scam your driver's license number or other personal information.
  3. Paying on time is all you need to worry about: Conventional wisdom holds that if you pay your balance on time, your credit score will never be tarnished. Unfortunately, conventional wisdom hasn't checked its story with a credit bureau. Your score can drop, even if you make your payments on time. The hiccup in your financial history will occur if you're maxing out your credit limit on a monthly basis. Credit bureaus will deduct points if you get too close to your limit's ceiling. If you find you're maxing out on a monthly basis, ask for an increased limit.
  4. If you don't activate your card, your account won't count: If you get cold feet and decide that a credit card isn't for you, failing to dial in the activation number won't stop it from showing up on your credit score. The bureau still recognizes a new account, whether you activate it or not.

The more you know, the less money you'll blow. It's a simple rule of thumb to keep in mind when you're dealing with plastic. The common misunderstandings that weave through our collective mindsets can be thwarted with some of these myth-dispelling tips. Keep them in mind, and keep your credit score where it belongs.

Published on April 22, 2009