Business credit cards are still subject to lending practices outlawed by the Credit CARD Act of 2009, according to a new study by the Pew Health Group’s Safe Credit Cards Project. The lack of protections on these cards could potentially affect millions of American households.
When the Credit CARD Act was passed, lawmakers omitted business credit cards from the new rules. This followed a tradition established more than 40 years ago when the Truth in Lending Act was passed. At the time, Congress concluded that “most businesses and corporations are in a good position to judge the relative worth of alternative credit plans and by and large do not require” the same protections that consumers do.
However, the Pew researchers point out that business credit cards are so ubiquitous today that the lack of protections could jeopardize the finances of American households.
Taking out a business credit card is extremely easy and requires little other than a legal business name and a social security number. And while the terms of business credit cards typically require cardholders to use the cards for “business” or “commercial” purposes only, in practice, these terms are vaguely defined and not enforced.
“Since 2006, nearly one in ten offers have been for business credit cards,” says Nick Bourke, director of the Pew Safe Credit Cards Project. “That means that U.S. households have received more than 40 million credit card offers a month during that period. The high volume of offers that is going out to U.S. households is placing people at risk.”
Business credit cards come in various forms, including corporate credit cards, small business credit cards or business credit cards for “professional use,” which target consumers who want to keep their business-related expenses separate from their personal expenses. Business credit cards can be particularly attractive to consumers because they come with higher lines of credit and sometimes longer introductory 0 percent APR offers.
However, like all cardholders, business credit card holders are personally liable for all expenses charged to their business cards. Furthermore, many consumers taking out business credit cards don’t realize that they are not covered by the same protections as standard credit cards.
The Pew study was based on credit card disclosures from the nation’s 12 largest banks, as well as consumer-direct mail data from January 2006 through December 2010. Here are the study’s key findings:
- Business credit card holders are not protected from arbitrary changes to terms. 80 percent of the cards surveyed featured terms giving card issuers the right to change the terms at any time, for any reason.
- Payments are applied to the balance with the lowest interest rate first. 84 percent of the business credit cards studied applied monthly payments to the lowest rate balances. This can be a particular concern for individuals or small businesses carrying long-term balances on their credit cards.
- Retroactive interest rate increases for late payments or over-limit charges are common. 67 percent of the business cards studied gave the issuer the right to apply penalty rate increases retroactively if the cardholder pays late or goes over the limit. This contrasts with a key provision in the Credit CARD Act, which protects consumers from interest rate increases on existing balances, unless the cardholder is 60 days behind with a payment.
- Business credit cards often feature high over-limit and late fees. 73 percent of the business credit cards studied featured a late fee, most commonly $39, and 67 percent charged an over-limit fee, also typically $39. In contrast, the Credit CARD Act specifically prohibits card issuers from charging over-limit fees, unless the cardholder specifically opts in for overdraft protection. The law also requires penalty fees to be “reasonable and proportional,” which means that, for consumer credit cards, over-limit fees cannot be higher than the amount overdrawn.
According to Bourke, the costs of these differences in terms can be considerable. Individual business cardholders can face hundreds or even thousands of dollars in unexpected charges if the card issuer increases the interest rate on existing balances. Furthermore, when penalty interest rates are applied, monthly credit card payments go up as well, making households with credit card debt on business credit cards extremely vulnerable.
Some card issuers have voluntarily introduced parts of the Credit CARD Act to their business credit cards. Both Bank of America and Capital One are now applying monthly payments to the balance with the lowest interest rate first, as stipulated by law for consumer credit cards. In addition, Bank of America has eliminated penalty interest rates, late fees and over-limit fees on its business credit cards.
“The practices of these banks show that additional consumer protections can be applied to all credit cards marketed to American households and that issuers can still receive fair compensation for the service provided,” says Bourke. “Now is the time for policymakers to ensure that the actions of these banks are not the exception, but rather the rule.”
At the very minimum, Bourke says, issuers should be required to clearly inform new credit card applicants when a credit card is not covered by the Credit CARD Act, so that cardholders can take the appropriate precautions.