Are New Credit Card Protections on the Way for Small Business Owners?
Slowly but surely, common sense is being infused into small business credit card policies. While Bank of America remains the only issuer that has yet extended the CARD Act protection against arbitrary interest rate increases for existing debt to its offers branded for business use, the rest of the major issuers bridged the gap a bit in 2013, according to the most recent installment of WalletHub’s annual Business Credit Card Report.
“We haven’t seen any monumental policy departures or shifts in hierarchy among issuers in the past 12 months as far as small business credit cards are concerned,” Odysseas Papadimitriou, a former senior director at Capital One and the current CEO of WalletHub, said. “However, there were some important indications that we could be on the precipice of real progress. Not only do issuers seem to be altogether more transparent these days, but they’re also bringing more and more of their customers under the umbrella of consumer protections that have proven to be both quite fair and very beneficial to the general public.”
Issuers Taking Baby Steps to Correct Regulatory Imbalance
Indeed, the past year has seen American Express spare small business owners from unsavory payment allocation practices designed to keep their most expensive debt on the books for as long as possible. It is the third major issuer to do so. The number of issuers who will give small business owners a heads-up about important changes to their account terms at least 45 days before they go into effect swelled to four this year as well, with Chase adopting the policy.
Why, you might ask, is this even necessary?
Lobbying, in short. Yes, this political climate’s dreaded “L” word has even made life harder on the nation’s small business community by convincing politicians that credit cards branded for small business use should not be included under the purview of the landmark Credit CARD Act of 2009. This law eliminated most of the sneaky and predatory practices that credit card companies were known for prior to the Great Recession and has resulted in an altogether more transparent personal finance landscape as we emerge from the downturn. But much like the law has saved consumers money by eliminating these abuses, it has also eliminated revenue opportunities for banks (even if they were a bit underhanded to begin with).
“Small business credit cards should have the same protections as consumers under the Act,” according to Dr. Peter Nigro, Sarkisian Chair in Financial Services at Bryant University. “Why were they not? Politicians wanted to appease the credit card companies and give them another revenue stream that was taken away by new consumer regulations. Sad but true.”
In other words, those who use general-consumer credit cards have more rights than those who use most business credit cards? That’s especially problematic when you consider that all major credit card issuers will evaluate your personal credit reports if you apply for a business card as well as hold you personally liable for any debt that you might incur. The vast majority also report small business credit card usage information to cardholder’s personal credit reports.
“Small business credit cards that are issued to owners of pass-through businesses are equivalent of individual ownership and likely treated as such,” says Dr. William Dunkelberg, Emeritus Professor of Economics at Temple University. “I provide a credit card to a non-profit; it has their name on it, but I am financially liable for it. So, it’s on my credit report. Unless a business is incorporated and qualifies for credit as a business, cards are likely to be ‘personal cards with the business name on it.”
The “business” moniker is therefore mostly a branding mechanism, as it belies very little about the underlying dynamics involved in the account. Sure, most “small business” credit cards offer enhanced expense tracking features and the ability to earn rewards on employee spending, but they can also cost you a lot more than that if you don’t take certain measures to compensate.
Stop-Gap Measures That You Can Take
As a small business owner, you’re going to be held personally liable for company expenses charged to plastic whether you’re using a business credit card or a consumer credit card. And since there is no rule against applying for a card under your own name and using it for business purposes, why not do so – at least for financing – in order to enjoy greater regulatory certainty?
You might prefer to use a single credit card for all business spending and do not wish to sacrifice the attractive rewards you’re currently earning in work-related spending categories, like office supplies and telecommunications services. That’s fair, and a Bank of America credit card – the Cash Rewards for Business, for example – could do the trick without leaving you susceptible to sudden cost-of-debt increases. You won’t be getting the best possible value, though.
But you would by implementing the Island Approach.
The Island Approach is a credit card strategy that entails using different cards for different types of transactions and/or needs. It offers a perfect end-around for savvy, value-conscious small business owners who want debt stability and the strategic planning freedom that comes along with it. With current offers in mind, the Island Approach could manifest itself something like this:
Need 1 – Lowering the Cost of Existing Debt (Consumer Card)
- Card: Slate Card From Chase – This so-called free balance transfer credit card offers 0% interest on debt transferred from another credit card for 15 months and doesn’t charge either an annual fee or a balance transfer fee (usually 3% of the balance being moved).
- Recommended Use: This type of balance transfer credit card can be extremely lucrative if coupled with a payoff plan that leaves you debt free (or near to it) by the time regular rates take effect. A credit card calculator can help you create such a plan as well as determine how much you stand to save.
Need 2 – Financing Upcoming Expenses (Consumer Card)
- Card: Citi Diamond Preferred Card - At 18 months, the Diamond Preferred Card’s initial 0% term is the longest on the market. It does not charge an annual fee.
- Recommended Use: While you might be tempted to use this card for making a balance transfer given the three extra interest-free months it offers compared to the Slate Card. However, it has a 3% balance transfer fee, which makes it better suited to financing big-ticket purchases that you’ve yet to make. Again, a credit card calculator can help you craft a debt payoff plan that will leave you sans balance by the time regular rates take effect.
Need 3 – General Rewards (Business Card)
- Card: Capital One Spark Cash for Business – In addition to providing 2% cash back on every purchase you make, this card offers a $100 initial bonus for charging at least $1,000 during the first three months and another $50 for signing an employee up as an authorized user. There is no annual fee during the first year ($59 thereafter).
- Recommended Use: The Capital One Spark Cash for Business is best used as the base card in your rewards earning arsenal. In other words, you should use it to make the majority of your everyday purchases while periodically taking advantage of great initial rewards bonuses and/or cards that offer more than 2% cash back in specific spending categories that are important to your business.
Need 4 – Supplemental Rewards (Business Card)
- Card: Ink Plus Business Card – Not only does this card offer 50,000 bonus points (redeemable for a $500 statement credit) for spending $5,000 during the first three months, but it also gives you 5 points per $1 spent on office supplies and telecommunication services and 2 points per $1 spent on gas and hotel accommodations. It doesn’t even charge an annual fee during the first year ($95 thereafter).
- Recommended Use: You should use this card to make all office supply and telecom purchases. If that alone won’t put you above the $5,000 initial spending threshold required to qualify for the $500 initial bonus, then expand the scope of your use for the first few months.
Is Corrective Legislation On The Way?
Ever since the CARD Act of 2009 took effect, the exclusion of small business credit cards from its protections seemed rather curious to us at WalletHub. After all, the law itself purports to apply to “open-ended consumer agreements.” Open-ended in this context simply means there is no specific date whereby the agreement concludes and all money lent comes do, as would be the case with a mortgage, for example.
It would therefore stand to reason that the word “consumer” is key here, but the relevant law states, “the adjective ‘consumer,’ used with reference to a credit transaction, characterizes the transaction as one in which the party to whom credit is offered or extended is a natural person, and the money, property, or services which are the subject of the transaction are primarily for personal, family, or household purposes.” One could make a case either way here, but wouldn’t you agree that most small business owners battle through long odds and hours to give their families a roof over their heads and food on the table? In other words, their business and all that goes with it are for family and household purposes.
Besides, if small business wasn’t so closely tied to personal life, why do banks pull personal credit reports when making small business credit card approval decisions or report usage information to accountholder’s personal credit reports or hold them personally liable for debt?
It simply doesn’t add up for us, many of the biggest issuers (as evidenced by their proactive extension of the law), or – it now seems – certain politicians. Rep. Nita Lowey (D-NY) on June 18 introduced the Small Business Credit Card Act of 2013 to Congress. If enacted, this law would bring credit cards branded for small business use under the CARD Act umbrella. It would also cost banks a lot of money, while making financial management safer and easier to understand for small business owners.
The website GovTrack.us lists the bill’s odds of getting out of committee at just 3% and the chances of it being passed at an even more meager 1%. Nevertheless, momentum is clearly building for an extension of consumer protections into the world of small business. And whether this Congress or another passes the legislation or banks take it upon themselves to proactively extend the relevant protections, small business credit card users have a lot to look forward to.