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The Credit CARD Act of 2009 put in place new consumer protections against deceptive credit card practices. The new credit card rules, however, did not include business credit cards. Instead, Congress charged the Fed to do a study on whether new credit card rules would be warranted for business credit cards as well.
The Fed recently released the long-awaited study report on the use of credit cards by small businesses. The conclusion? The Fed argues that the cons of introducing tighter rules for business credit cards would likely outweigh the pros. The Fed’s main rationale for the conclusion is based on its finding that only 18 percent of business credit cardholders borrow on credit cards, compared to 46 percent of consumers using credit cards. As a consequence, the Fed concludes, fewer business credit cardholders are affected by adverse credit card terms like retroactive interest rate hikes and punitive default rates.
The Fed predicts that the fall-out from tightening credit card terms, in the form of lower credit lines, higher initial interest, and more modest intro offers—would far outweigh the benefits of tighter credit card regulations by curtailing businesses’ access to needed credit. Moreover, the Fed states, it is harder for credit card issuers to determine a business’ creditworthiness as opposed to a consumer’s, because reliable credit records and scores aren’t always available for companies. As a result, many credit card issuers take on greater risk lending to businesses, and, the Fed believes, they are willing to do so because they have the ability to change terms at a moment’s notice. Removing that ability could cause issuers to think twice before handing out credit to companies.
Curiously, the Fed’s findings that only 18 percent of small business credit cardholders use their credit cards for borrowing differ from the findings of the 2009 Small Business Credit Card Survey. In the survey of small business credit card usage, 60 percent of respondents carried a balance from month to month and a full 37 percent carried a balance of more than 10K on their cards. Further, almost half of respondents paid more than 15 percent interest rate on their cards with one out of five paying 20 percent or higher. Almost eight out of ten business owners (79 percent) reported that their credit card terms had worsened over the past five years.
For businesses actively relying on credit cards to fund part of their operations, the Fed report may come as a disappointment. It means that credit card financing, already more expensive than other types of credit, will also remain an unpredictable and unreliable source of financing. Many business credit cards today carry onerous terms, in one case, for example, enabling the card issuer to apply a 29.99 percent default rate to existing balances following one late payment. The Fed report means that going forward, interest rates hikes, increased monthly payments, and other unpredictable changes can befall business credit cardholder at any time, making financial planning difficult and businesses vulnerable.
Despite the Fed’s reluctance to include businesses in the new credit card protections, businesses who want in on the CARD Act terms, do have options. Some business owners opt to carry company balances on personal credit cards in order to benefit from the new provisions. Financial advisors, however, recommend against this, as the balance will affect the cardholder’s personal credit score, which balances on business credit cards generally do not.
A better option is to look for business credits cards from card issuers that have voluntarily adopted more user-friendly business credit card terms. Bank of America, for example, has announced that it will voluntarily implement more consumer friendly rules for business credit cards. BofA business credit cards feature some of the lowest interest rates in the market for people with good credit, and business cardholders enjoy the same protections against retroactive interest rate hikes as consumers do, and will receive a minimum 45 days’ advance notice of rate increases for future charges.
