newjerseynewsroom.com

BY PAUL SISOLAK

The word "myth" usually conjures up images of aliens, Bigfoot or a U.S. economic recovery. Rarely, if ever, do we lump personal finance and credit cards into the camp of unfounded rumor.

Credit cards have always seemed pretty simple to understand -- swipe, receive bill, pay bill. If only it were that straightforward. Credit card debt was more than $700 billion in 2011, hinting at the fact that Americans have not been very cautious with their lines of credit, and that there is a lack of understanding of the obvious and not-so-obvious myths involving our trusty plastic cards.

With April being National Financial Literacy Month, it is time to debunk some of the most common credit card facts and fictions.

1. Debit and credit cards boost your credit score.

Look at a debit card and credit card side by side, and it is hard to differentiate the two. Both operate on a similar principle but are actually very different when it comes to your credit score.

A debit card has no effect on a credit score because it is tied to a checking account. Because funds are automatically deducted, there is no credit involved. A credit card purchase, on the other hand, involves borrowing money from a bank or lender with the principle of paying it back. Timely or untimely payments get reported to the three credit bureaus, which affects your credit score. But TransUnion, Experian and Equifax do not deal with debit cards.

2. My minimum balance is all I need to pay.

They say that credit card companies make their money from getting consumers to remain in debt by encouraging them to pay off their minimum monthly balances and charging them high interest rates and fees when the remaining balance is overdue. The importance of whether this is true or not is another myth -- the fact is, if a credit card holder only pays their minimum monthly balance, they will always owe money to the credit card company. This is an important thing to remember: a credit card balance is not paid off until it is paid off in full.

For more in finance, please visit our Credit Center.

3. You can harm your credit score by checking your own credit.

If a lender, auto dealer, bank or property manager checks your credit score, this is known as a "hard" inquiry -- the kind that can knock your credit score down a few points. For the person with poor credit, it is painful, but sometimes unavoidable if we want to buy or lease in today's economy. But there is no need to worry. A self check into your own credit report will not harm it; that would be like losing dollars each time you logged in to your online checking account.

4. There is a "no-limit" credit card.

Every credit card has a spending limit. It is as simple as that. Thinking otherwise could be one reason why indiscriminate spending contributed to the U.S. national debt. Many consumers fall into this trap, however, by taking out "exclusive" credit cards from companies that do not disclose their NSPLs, or Non-Preset Spending Limits, with hopes that the customer will be tricked into believing they can spend limitlessly.

There is one big drawback to enrolling in a card emblazoned with marketing buzzwords like Gold, Black or VIP, and buying into no-limit spending: sooner or later, the card holder will max out their account and damage their credit score.

5. Fixed interest rates do not change.

The 2009 CARD Act regulates to what degree creditors can raise fixed interest rates. Generally, rates do not change all that much, except for unique circumstances, such as withdrawing cash from a credit card account -- this can spike interest rates.

What changes interest rates for the worst is a late -- or worse yet, partial -- payment made on a credit card balance. This will prompt a credit card company to impose a penalty interest rate; expect 30% in many cases.

6. There are "minimum" retail purchase amounts.

It is only when we have reached the front of the line with a$2 bottled water, credit card in hand, before reading the sign that says, "$5 minimum credit card purchase." Retailers commonly pay their credit card providers 2% of each total sale paid for on credit -- which can be a big loss to the small businesses. Retailers may impose a minimum charge amount to avoid this fee, especially when the purchase amount is low. However, it is not allowed.

Merchants have no authority to impose a minimum limit on how much a customer can charge to their credit card. Oddly, this is not something that credit card companies enforce on a regular basis. Consumers can try to combat this by reporting the merchant to the credit card company, carrying ample cash or taking their business elsewhere.

7. "I can afford my entire credit limit."

Unless you have become a master of avoiding rent, mortgage payments and grocery expenses, few people can afford to spend up to their $20,000 or $30,000 credit limits. But many people overextend (or max out) their credit cards without considering that credit limits are different for everybody.

A person's spending and bill payment history is usually what a credit card company uses to determine what a respective credit limit will be. But they do not take into account what a customer's monthly budget or expenses may be. Customers often wrongly believe this myth -- that a credit limit is what they can afford. Simply put, a credit limit in the tens of thousands of dollars does not necessarily mean it is what a person can comfortably borrow, and pay back, without going into major debt.

Every day people fall for credit card myths that can hurt their financial well-being for years to come. As part of National Financial Literacy Month, take the GoBankingRates financial literacy credit card quiz to test how knowledgeable you are, and visit GoBankingRates.com for more on personal finance topics made easy.