Small Business Credit Card Study: Liability, Credit Reporting, and CARD Act Inclusion
Given recent studies showing the Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009 to be an unqualified success for consumers, it is abundantly clear that the failure to apply the same protections to small business owners is a curious, somewhat inexcusable oversight on the part of legislators.
As a result, we decided to investigate the law as well as the policies of the top ten credit card issuers in search of answers. Specifically, we wanted to know three things: Who is liable for business credit card use, how are business credit cards reported to the major credit bureaus and why exactly were CARD Act consumer protections not extended to small business owners?
Business Credit Card Liability and Credit Bureau Reporting
Through examination of published credit card applications and "terms and conditions" as well as direct contact with representatives of the 10 largest credit card issuers, we discovered that an overwhelming majority of issuers hold both individual owners and their small businesses liable for use of a business credit card. What’s more, at least six of these issuers make it a practice to report business credit card usage information to their cardholders’ major credit reports.
Please find our issuer-specific findings in the table below. Given the importance of this subject matter, we felt it necessary to rate issuers based on their transparency. Issuers who provide information about both their business credit card liability and how these cards are reported to the major credit bureaus receive a rating of “Good;” those who provide information about only one of these topics receive a “Mediocre” rating; and those who do not make information about either topic available receive a “Bad” rating.
|Issuer||Cardholder personally liable?||Usage information relayed to cardholder's personal credit reports?||Issuer Transparancy|
|American Express||Yes||Yes, when the account is cancelled and seriously delinquent||Good|
|Bank of America||Yes||Yes, when the card holder is more than 60 days delinquent||Good|
|Chase||Yes||Yes, when delinquent||Good|
|Citibank||Yes||Ambiguous answer that it depends on individual situation||Mediocre|
|HSBC||Yes||Declined to respond||Mediocre|
|USAA||N/A (does not offer a business credit card)||N/A||N/A|
|U.S. Bank||Yes||Declined to respond||Mediocre|
Inside the CARD Act
It is important to understand that the credit-card-related provisions of the CARD Act apply to “open-ended consumer agreements.” In addition, applicable U.S. Code holds that: “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.”
The only section of the CARD Act which applies directly to small businesses credit cards merely required the Federal Reserve Board of Governors to review various aspects of the small business credit card landscape, report these findings to Congress and make any administrative or legislative recommendations necessary based on these findings.
First of all, the term “business credit card” is misleading. The logical assumptions one would make are that eligibility for such a card would be based on a business’ credit worthiness, that liability for its use would fall squarely on the business itself, and information about both its use and misuse would be expressed in the business’ credit reports. However, as this study illustrates, each of these assumptions would be false. It therefore seems that “business credit card” is merely a branding term used by credit card companies to segment their products and is not an indicator of any fundamental difference relative to other card types.
Secondly, given the language of the law, it is not clear whether the CARD Act should be applied to business credit cards. This determination rests on whether a business credit card meets the definition of “consumer” (see above).
Is the party to whom credit is extended to a natural person? Yes, because not only is a small business owner's credit standing used for eligibility, but this person is also held personally liable and information about card usage is relayed to his or her individual credit reports. Are the transactions made with a business credit card “primarily for personal, family, or household purposes? Well, how this question is answered most likely depends on personal opinion, but one could argue that a small business owner making the purchases necessary to run his business and thereby provide for his family is definitely using a business credit card for family and household purposes.
Even if you do not agree with that line of thinking, consider the aforementioned definition in terms of a small business owner who uses a personal credit card for business spending. According to the Federal Reserve Board’s “Report to the Congress on the Use of Credit Cards by Small Businesses and the Credit Card Market for Small Businesses,” 46.7% of all small businesses used personal credit cards in 2003. Should these credit cards therefore not be afforded CARD Act protections because they were not used for what some would call “personal, family, or household purposes?”
Ultimately, as you examine personal and business credit cards closer, both the differences between the two and the law’s application to each become ever murkier. As a result, the moniker “business credit card” should be replaced (with “professional credit card,” perhaps) and CARD Act protections should be applied to credit cards across the board.
There are three ways in which this could take place. First, federal regulators can realize the confusion and imbalance created by the current application of the CARD Act and step in and make adjustments. By simply ignoring labels and applying consumer protections to any type of credit card for which an individual, rather than a corporation, is responsible, a more common sense system will result.
Second, small business owners can essentially take it upon themselves to apply CARD Act regulations to their business spending by simply using personal credit cards for all of their company expenses that lead to a monthly revolving balance.
Finally, instead of waiting for inevitable outside regulation, credit card companies can proactively apply CARD Act provisions to their business credit card offerings. Doing so would not only improve the industry’s image, it would indicate to regulators that issuers can police themselves and would therefore take them out from under the federal microscope.
While not all issuers will be eager to do so initially, the ones who do will have a significant advantage over their competitors since the most sophisticated small business owners will gravitate to them. As a result, in the second installment of our Small Business Credit Card Study, we investigate credit card company policies regarding the rates, fees and usage of business credit cards in order to determine which, if any, major issuers have proactively applied CARD Act regulations.
Update 07/18/2011: Information about Wells Fargo's business credit card policies has been updated. In response to this study and subsequent articles concerning it, Wells Fargo contacted WalletHub, indicating that they hold customers personally liable for business credit card use and that such information is disclosed on the "Personal Guarantee" section of their business credit card applications and cardholder agreements. They further communicated that charge-offs may be reported to small business owners' personal credit reports. Wells Fargo's overall transparency rating has been upgraded from "bad" to "mediocre" as a result. While the company did eventually provide the information we requested in conducting this study, Wells Fargo was not given a score of "good" because of its initial unwillingness to provide basic and important information as well as the fact that its business credit card policies are not available online, where many consumers conduct credit card research before deciding to apply for a credit card.
For questions or more information regarding this study, please contact our media department.
Please find the second installment of our business credit card study here: Small Business Credit Card Study: CARD Act Protections