Though Personal at Their Core, Small Biz Credit Cards Enjoy Few Consumer Protections
Small business credit cards should have the same accountholder protections as their general-consumer counterparts, plain and simple. But they aren’t covered under the Credit CARD Act of 2009 – landmark legislation that has made personal finance altogether more transparent and consumer-friendly in the aftermath of the Great Recession.
Small business cards weren’t excluded due to any fundamental difference between them and “normal” credit cards. There’s no physical difference, obviously, and most, it not all, issuers: 1) evaluate small business owners’ personal credit history when making business card underwriting decisions; 2) report usage information to their personal credit reports; 3) hold business owners personally liable for any debt incurred.
So what’s with the regulatory imbalance?
“Politicians wanted to appease the credit card companies and give them another revenue stream that was taken away by new consumer regulations,” says Dr. Peter Nigro, Sarkisian Chair in Financial Services at Bryant University. “Sad but true.”
What types of revenue streams are we talking about here? Well, some of the rights issuers retained by not having their business-branded products included in the scope of the CARD Act are: 1) the freedom to raise interest rates on existing balances for little or no reason, thereby making debt suddenly more expensive; 2) the ability to charge interest based on average account balances over the past two months, rather than only the current billing period; 3) unfair payment allocation practices, whereby payments for accounts with multiple balances can be attributed to the least expensive debt until it is paid off; 4) the ability to change key account terms without 45-days’ notice.
In other words, the issuers were allowed to retain sneaky and unfair practices that enable them to milk small business owners for all they are worth. The good news is that, according to a recent CardHub study, all of the major credit card companies that issue small business cards have taken it upon themselves to proactively ban so-called double-cycle billing. Half of the major issuers have adopted the CARD Act rule requiring 45-days’ notice of important changes to account terms. A handful have also implemented CARD Act payment allocation rules, which dictate that the amount of a payment above the minimum required must be attributed to the balance with the highest interest rate.
Perhaps this is a sign of issuers who understand the value of customer service working to do right by an important cohort. Or maybe it reflects an understanding within the industry that the CARD Act should truly apply to small business credit cards and that such an event is inevitable, given its innate logic.
Nevertheless, small business owners must tread carefully in the current landscape, particularly because only Bank of America has extended the most important CARD Act protection of all to its business-branded cards: the guarantee that interest rates for existing balances will not change unless the cardholder is 60 days delinquent or a promotional term concludes.
That, of course, means all non-BofA business credit cards are ill-suited for funding purposes. While the odds of getting the best possible 0% deal on the market from the one issuer that offers beefed up consumer protections isn’t good, small business owners do have an end-around. They can use a 0% general-consumer card to save on big-ticket purchases or lower the cost of existing debt.
By also isolating everyday business expenses on a rewards business credit card, you’ll be able to garner the best possible combination of low rates, attractive rewards, and helpful consumer protections. So, when you decide it’s time to overhaul the logistics of your company’s spending and payment habits, take a trip to the islands. And while you’re there, write your regulators and ask why there’s no love for the little guy!
Odysseas Papadimitriou is CEO of CardHub, a website where consumers can learn about and compare credit cards.