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Business owners, beware. Or at least be wary.
That's the warning from a new study by the Pew Charitable Trusts, a Philadelphia-based nonprofit that does a lot of research to help affect policy, and they've been on a tear lately with studies on credit cards, having just come out with one about late fees.
Their most recent study, titled, "U.S. Households at Risk from Business Credit Cards," looks at small business owners and warns what many personal finance experts have cautioned for some time. Business owners need to be careful managing their business cards. According to Pew, 80 percent of business credit cards have terms that the credit card companies can change at a moment's notice.
Credit CARD Act applies to personal credit cards
That used to be the game plan for personal credit cards as well, but that stopped in 2009 when President Obama signed the Credit Card Accountability, Responsibility and Disclosure (CARD) Act. Now, credit card providers are required to give at least 45 days' notice to consumers before changing their terms, and if an individual wants to opt out, they usually can, which means they stop their accounts and continue paying the balance until it's gone--but under the old, lower interest rates.
This is all good stuff for the consumer, but one might well say, "Why does this matter for a business? They can afford high-interest rates changing whenever. They have deep pockets."
Small business at risk
The problem, according to Pew, is that not everyone brandishing a business card is an executive at a multi-billion dollar company. As Pew's report says, "Credit CARD Act protections do not apply if a card is labeled for business or commercial use, regardless of whether the account holder is a large corporation, a small business owner, an employee or an ordinary consumer. Thus, while consumer credit cards in general no longer include unpredictable pricing structures and hair-trigger penalty interest rates, these and other potentially harmful practices remain common on business credit cards that millions of individuals use."
And as time goes on, business owners--who are, after all, consumers of personal credit cards as well--may not be aware of the differences between consumer and business credit cards. If they use their business credit card in the same way they use their individual card, they could find themselves in trouble.
For instance, if you have a business card, you can be hit with penalty interest rates for an indefinite period of time.
Not so with personal cards, where the penalty interest rates aren't triggered to existing accounts unless they're 60 days past due.
Business cards have unrestricted penalty fees. With consumer credit cards, individuals have to opt in and agree to over-limit fees, and penalties have to be "reasonable and proportional" according to the law. Defining "reasonable" may be tricky but "proportional" means that an over-the-limit fee can't be over $2 if the charge is for buying a $2 pack of gum.
When a business makes a credit card payment, the bank can direct that payment toward low-rate balances while the interest climbs on the balances with higher rates. No CFO would be likely to suggest doing that, if they had their way. They'd likely do what is now required of personal credit cards. The credit card companies are mandated to send any money over the minimum payment to the highest-rate balance first.
Happily, as noted earlier, while 80 percent of business cards have terms that can change whenever they like, that means 20 percent of business credit cards aren't doing that. As Pew notes, credit cards from Bank of America and Capital One remain notable exceptions, having given their business credit cards a lot of the same protections that their consumer cards have.
So it's not all bad news out there at all. It's just that business owners have to follow the same advice consumers always get about working with businesses: "Caveat emptor." Let the buyer beware.