Business Credit Cards Are Not for Everyone

If you’re a small business owner, you have probably experienced firsthand the frustration of trying to find funding in a shrinking pool of small business lending. While banks are unwilling to make loans, they are approving more and more business credit cards. Borrowing on such a card may seem like the only option, but this practice has its risks, since professional or business credit cards are not covered by the protections of the CARD Act.

The CARD Act (which stands for the Credit Card Accountability Responsibility and Disclosure Act), was signed by Obama in 2009, and gives consumers more protection against controversial billing practices and fee increases. For example, under the Act, credit card companies must:

Give 45-days notice of any significant changes such as interest rate increases and annual or late fees.
Give consumers 21 days between the statement mailing and the payment due date. The due date must be consistent from month to month.
Inform account holders how long it will take to pay off a balance with only minimum payments, and how much they’d have to pay each month to pay off the statement in 3 years.
Keep penalty fees equal to or under the minimum payment amount.
Turn down over-the-limit transactions unless the account holder approves such transactions.
Not increase interest rates within the first year of opening an account (there are some exceptions, such as for payments later than 60 days). Rate increases after the first year can only apply to new charges.
Credit cards can’t charge annual or application fees greater than 25% of the credit limit.
Payments must be directed to balances carrying the highest interest rates first.

None of these protections apply to owners of “professional” or business credit cards. Card issuers are perfectly within their rights to raise rates without advance notice, add fees for inactivity, and charge late fees over $25 after one missed payment. To balance these risks, professional cards also give their owners certain kickbacks. For those with a healthy credit score who are on top of their payments— paying off their balance every month and never incurring late fees— the risks with the cards are minimized, and the rewards can be substantial. For example, many cards pay back 1-5% on gas, travel, restaurants, office supplies, and other purchases. These cards also give their owners monthly, quarterly and annual detailed statements, which help business owners manage their records and finances. In general, small businesses are good at paying off their monthly balances, and since professional cards allow larger credit limits, the ability to do business efficiently is often worth the risk of rate hikes.

These types of cards might be perfect for some business professionals, whether small business owners or top CEOs, as long as they are aware of the risks. The problem is when consumers get these cards without realizing exactly what they’re signing up for. Many individuals describe their surprise at discovering— often via fee increases— that they have a corporate or small business card exempt from the protections of the CARD Act. That’s because there’s been a disturbing trend of credit card companies sending offers to non-business people. The Wall Street Journal reported the research firm Synovate’s discovery that “in the first quarter of 2010, issuers mailed out 47 million professional offers, a 256% increase from the same period last year.” According to one credit card consulting firm in Thousand Oaks, CA, the new federal rules “are expected to drain $11 billion a year from the industry over the next five years.” Trying to make up for lost revenue, the credit card industry is sending offers for professional cards to as many people as possible, and making it easier for individuals to qualify for these cards not covered by the CARD Act restrictions.

While the world of credit cards can be confusing, there are things you can do to protect yourself. Like with any contractual agreement, be sure to read the fine print. And whether you use these cards for business or personal purchases, if you feel you are being unfairly charged, approach the credit card company: “Cardholders would be surprised at how much they can raise hell and get a change,” said self-employed computer programmer Alan Condon in a Wall Street Journal interview.

You can find more resources for managing your credit at RocketLawyer.com

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