In 2009, Congress passed the Credit Card Accountability Responsibility and Disclosure (CARD) Act to protect consumers from unfair practices, such as hidden fees and unexpected rate hikes. As a result, credit card issuers can't increase interest rates in the first year and must send a rate increase notice 45 in advance. You'd think it'd be 45 days before the rate goes up, but it's not. It's when the first payment is due (Source: credit.com).
The act also required credit card companies to let customers pay off the current credit card balance at the lower interest rate, allow customers to close accounts if their annual percentage rates (APR) go up and provide statements to customers at least 21 days before the payment is due. Furthermore, any penalties and fees had to be reasonable and proportional. Proportional means credit card companies couldn't charge a fee that's higher than the balance on the credit card.
While all that sounds great, the Truth in Lending Act excludes credit cards for business or commercial use. It doesn't matter if the cardholder is a corporate employee, sole proprietor or small business owner. The exemption means that "business" credit cards don't have the same protections that personal credit cards users expect. Here are some stats from the 2011 Pew Charitable Trusts study:
- "80% of business credit cards included an 'any time' change in terms clause with no right to opt out."
- "67% of business cards had penalty rates for late payments or overlimit transactions. The median penalty annual percentage rate (APR) was 29.4%."
- Penalty fees are virtually unlimited, which results in:
- 67% of business cards included an overlimit fee (media amount: $39).
- 73% of business cards included a late fee (median amount: $39).
- 41% of the cards had an annual fee with a median of $67.
- "Median Purchase APR: 13.24 (lowest advertised) and 18.12 (highest advertised)."
What does this mean for businesses? Some people work around this by making business purchases with their personal credit card. The problem, for one, is that business debt will show up on your personal credit score and it can cause problems with business deductions. Not to mention, it can cause confusion with accounting.
This is one case where reading the fine print is worth your time. My suggestion is to use credit cards for manageable purchases that you know you can pay off when the bill comes, and not pay any penalties for having a balance. These credit cards aren't ideal for working capital and large purchases as they'll lead to high fees and penalties when not paying off the balance when the bill arrives. Even if banks won't grant you a loan, there are other options such as accounts receivables financing.
Things may change if Congresswoman Nita Lowey gets support for the Small Business Credit Card Act of 2011 (H.R. 1137). This extends the Card ACT protections with businesses employing up to 50 people.
What other solutions are there for businesses to stay away from business or commercial credit card problems? How should businesses use credit cards? Or not use them at all?