Study Warns of Risks from Small-Biz Credit Cards

May 24, 2011

A new report, “U.S. Households at Risk from Business Credit Cards,” by the Pew Charitable Trusts (Pew) echoes the warnings about small-business credit cards that NSBA has sounded since before Congress enacted the Credit CARD Act of 2009.

Although strongly supportive of the overall legislation, NSBA urged Congress at the time to extend the bill’s protections to the cards used by America’s small-business owners. NSBA repeatedly argued that the failure to explicitly protect small-business cards would be detrimental to the U.S. economy.

This warning is underscored by the new Pew study which analyzed business credit card application disclosures and household direct mail data from the nation’s 12 largest credit-card issuers, which control approximately 85 percent of the small-business credit-card market.

The Credit CARD Act contained a number of reforms aimed at addressing the most egregiously “unfair” and “deceptive” practices of the credit-card industry. Since the law amended the Truth in Lending Act (TILA), which for the most part applies only to “consumer” and not business credit cards, the protections did not apply to cards labeled for “corporate,” “small business,” or “professional” use.

Although these “business credit cards” largely resemble consumer cards, they do not carry any of the protections contained in the Credit CARD Act. While the account agreements for these cards usually include language requiring a cardholder to only use the card for “business” or “commercial” purposes, these terms rarely are defined and the cardholder personally is liable for all expenses on any card linked to the account.

Thanks to the Credit CARD Act, issuers no longer may change the terms of a consumer credit-card agreement at any time for any reason. The same is not true for business credit cards. According to the Pew study, 80 percent of business credit cards are saddled with an “any time” change clause—which includes the right to retroactively increase interest rates on existing balances—with no right to opt out.

The Credit CARD Act precluded credit-card issuers (with minor exceptions) from retroactively raising interest rates on existing balances—unless the cardholder is more than 60 days late. Having been denied this protection, 67 percent of business credit cards were subjected to penalty interest rates for late payments or over-limit transactions. The median penalty annual percentage rate was 29.4 percent.

The Credit CARD Act required issuers to apply payments above the minimum to the balance with the highest interest rate. Having been absolved of this obligation in respect to business credit cards, 84 percent of business-card disclosures reserved the sole power to apply payments to low-rate balances first to the issuer.

The study also found that penalty fees for business credit cards are “virtually unrestricted.”

Amazingly, 41 percent of small-business credit cardholders pay an annual fee for the pleasure of remaining unprotected, compared to only 14 percent of consumer cardholders.

The Pew study concludes with the following policy recommendation: “To better protect individuals, small business owners, and their families, Pew encourages policymakers 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.”

NSBA applauds Pew for undertaking a study on this critical  and overlooked issue and urges Congress and the Administration of President Barack Obama to heed Pew’s sage advice.

While the not structured exactly as envionsed by Pew, the Small Business Credit Card Act of 2011 (H.R. 1137), introduced by Rep. Nita Lowey (D-N.Y.) and ten cosponsors, would extend the protections previously codified by theCredit CARD Act to the credit cards used by small-business owners with 50 or fewer employees.

It is critical that this legislation receive additional support. Please take a moment right now to ask your representative to sign on as a cosponsor to the Small Business Credit Card Act.

Please click here to read “U.S. Households at Risk from Business Credit Cards,” by the Pew Charitable Trusts.