Editorial Policy

Credit Card Reform Offers No Relief for Businesses

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By Eva Norlyk Smith, Ph.D.
March 2, 2010

The new credit card rules, which stepped into effect at the end of February, introduce a number of important new protections for consumers. Unfortunately, the new rules exclude one of the parties that need the new protections the most: small businesses.

Many small businesses, particularly start-ups, often rely on business credit cards to fund costs and bridge gaps in cash flow. In the wake of the continuing credit crunch, even established small businesses have increasingly begun to rely on credit cards. Credit card usage of small businesses jumped from 49% in December of 2008 to 59% in April of 2009, and while this was at the height of the credit crisis, other sources of funding for small businesses remain tight.

Like consumers, businesses need to be able to know which interest rate they will be paying on credit card balances in order to make decisions about cash flow and how much debt to take on. For businesses, this is perhaps even more vital, since business credit cards generally come with higher lines of credit, and small businesses tend to carry higher balances on their business credit cards.

Unfortunately, some of the key protections of the new law are for consumers only. The new law protects consumers against retroactive interest rate hikes on their credit card balances. Card issuers can only raise interest rates on new charges, and they have to give cardholders at least 45 days notice of the increase and the right to opt out.

For business credit cards, however, these rules do not apply. If a business owner puts a large balance on a card with an attractive interest rate of say 6 percent, that rate could double or even triple tomorrow, and the cardholder would have no protections against it. Worse, as card issuers see profits decline as a result of the new consumer credit card rules, they may be tempted to increase interest rates and tighten other terms on business credit cards to make up for the difference.

Business card users also will not be able to enjoy another important new credit card protection introduced by the new law: fairer payment allocation. In the past, all credit card payments have been applied to the balance with the lowest APR first, making it impossible for cardholders to knock off high-interest balances without paying off the card in its entirety.

That all changed under the new Credit Card ACT, which stipulates that any payment amount over the minimum must be allocated to pay off the highest-rate balance on the card. Business credit cards, again, are excluded from this rule. For example, a business owner who takes out a 0 percent APR balance transfer of $5,000 on a business credit card, and then accumulates $10,000 in new purchases at a 19.99 percent interest rate, will end up paying 19.99 percent interest on the entire $10,000 balance until the $5,000 has been paid off in full.

Other differences apply, and for small business owners using both business credit cards and consumer credit cards for personal expenses, it can be confusing, to say the least, to keep track of the differences between the two types of cards and easy to overlook the added risks of business cards.

And unfortunately, while it might seem like a good solution to simply use a personal credit card for business expenses, most experts advise against this practice. Firstly, it might void the business owner’s ability to deduct interest expenses or annual fees on the credit card; worse, it could put the company’s corporate structure at risk. Further, any balance carried on a personal card for the business would weigh down the cardholder’s credit score.

And unfortunately, while it might seem like a good solution to simply use a personal credit card for business expenses, most experts advise against this practice. Firstly, it might void the business owner’s ability to deduct interest expenses or annual fees on the credit card; worse, it could put the company’s corporate structure at risk. Further, any balance carried on a personal card for the business would weigh down the cardholder’s credit score.