The Credit Card Accountability, Responsibility and Disclosure Act of 2009 — known best as the “Credit CARD Act” — was praised by many as a significant step in the right direction for protecting consumers and their credit. But while the legislation pared back longstanding threats to consumer credit cards, small business credit card holders have not enjoyed the same protections.
A recent and highly unsettling study from the Pew Safe Credit Cards Project finds that many small business owners remain in the dark about not being afforded the same consumer credit protections.
Not All Credit Cards Are Equal
According to business analyst Mike Randazzo, the potential risks associated with small business credit cards grossly outnumber those of general consumer credit cards.
“Conventional wisdom,” Randazzo tells the Intuit Small Business Blog, “has us mistakenly believe small business credit cards are somehow ‘safer’ and offer greater protections than the cards that occupy the wallet of ‘Average Joe’ consumer. This isn’t true.”
The report adds: “Practices the Federal Reserve deemed ‘unfair’ or ‘deceptive,’ such as hair trigger interest rates and unpredictable rate increases, remain widespread in business credit cards that are regularly offered to American households.”
“Every month more than 10 million business credit card offers are mailed to households at all income levels,” Nick Bourke, director of Pew’s Safe Credit Cards Project, said in a statement following the release of Pew’s study. “The sheer number of offers that are sent to homes all across the nation represents a risk to millions of American families.”
Pew analysts reached their findings by sifting through myriad business credit card application disclosures, a process that revealed no shortage of sobering facts. 80 percent of business cards, for example, include an “any time” change in terms clause with no right to opt out. Put another way, the bank issuers can change account terms at any time with little or no notice.
Unlike the new protections that safeguard general consumers from excessive predatory fines, business credit card penalty fees are virtually unrestricted and “may not be reasonable and proportional to the violation.” Sure enough, 67 percent of business cards, according to Pew researchers, included penalty rates for late payments or overlimit transactions.
“Issuers can apply a penalty interest rate immediately and without notice for any violation and that rate can last indefinitely on any balance,” Pew researchers learned.
The Devil Is Always in the Details
“Fortunately,” Randazzo admits, “there are precautions small business owners can take to avoid the virtual credit traps that many lenders have set. The most important — and obvious — is to read the fine print and review with an attorney, if necessary, the applicable terms and conditions from the lender issuing your card. Only then can you adequately access any legal differences between the lender’s consumer and business credit cards.”
The folks at Pew are advocating for new small business credit card protections via updated legislation that expands the consumer safeguards.
“To better protect individuals, small business owners, and their families,” the report reads, “Pew encourages policy makers to extend the safeguards of the Credit CARD Act to any credit card product that requires an individual to be personally or jointly liable for account expenses. At a minimum, policy makers should require issuers to alert applicants whenever a credit card is not covered by the Credit CARD Act, specifically highlighting the risk of significant interest rate increases on existing balances and higher costs from penalties, payment processing and fees.”
To read the complete report from Pew, click here.