Many small business owners use a credit card opened in the name of their firm to buy things for their company. But a new federal law that regulates rates and fees on consumer credit cards does not cover these cards.
According to the Federal Reserve, a little more than a third of small businesses used business credit cards in 1998. Now that rate stands at about 64%.
Like many forms of consumer protection, Congress considers business owners to be more sophisticated (for example the Real Estate Settlement Procedures Act does not apply to investor or commercial property transactions) and thus the CARD Act only applies to credit cards issued to consumers.
Issuers are aggressively marketing credit cards to small businesses. According to Synovate, issuers mailed out 46 million professional credit card offers in the first quarter of the year, a 256% increases from the 13.2 million offers mailed during the first quarter of 2009.
"The credit card industry is rebounding and issuers are trying to generate account and revenue growth again. The CARD Act regulations eliminated billions of dollars of annual revenue from banks and issuers, so they are looking under every seat cushion they can to find extra money. Small business cards seem to be where issuers see some potential and these cards are not governed by the CARD Act," says Bill Hardekopf, CEO of LowCards.com.
He notes the National Small Business Association has lobbied for legislation to include small business cards in the Act's protections.
It may be tempting, Hardekopf continued, to use personal cards for business so they can receive protections, but that may not be a wise move. Interest payments on a consumer credit card are not a business expense tax write off. Plus, separating business expenses from personal expenses can also create an accounting nightmare.
Another issue, especially among mortgage originators, is that business debt that appears on personal credit cards can negatively affect credit score. Under the SAFE Act, regulators can pull credit scores for the purpose of approving or denying a license.
According to Hardekopf, Bank of America now extends many of the CARD Act protections to small business credit card customers, including an agreement not to raise interest rates on existing balances and 45-days-notice of future rate changes.
