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The Complications of Choosing a Small Business Credit Card

Local shop owners got the short end of the stick with the CARD Act.

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Consumers are protected from arbitrary credit card interest rate increases, but small business owners aren't so lucky.

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In case you didn’t know, May 12 through 16 is National Small Business Week. This new age “holiday” is perhaps best known for the festive discounts that consumers are afforded at small businesses nationwide, but it’s about much more than that. Small Business Week is also about paying tribute to the so-called backbone of our economy, and doing so is more important than ever given the way small business owners have been treated in recent years.

The past few years have been dictated by economic events and our reactionary efforts to correct them. The Credit CARD Act of 2009 represents one of the most significant such efforts, as it drastically overhauled consumer rights and increased transparency in the credit card market. The law eliminated predatory pre-recession tactics like bait-and-switch pricing, double-cycle billing and the assessment of oppressive penalty fees. Its effects can be seen in a $6 decrease in the average late fee, a near-elimination of over-limit fees and a 2 percentage point drop in the overall cost of credit from 2008 to 2012, according to the Consumer Financial Protection Bureau.

Unfortunately, small business owners weren’t invited to the party. The CARD Act only applies to general consumer credit cards, which means the 30 percent of small business owners who use credit cards to finance company operations each year are susceptible to some shady terms and conditions. 

Where’s the Legal Love?

The most significant CARD Act protection that small business owners do not enjoy is the rule against arbitrary interest rate increases. An ordinary consumer now has to be at least 60 days behind on his or her payment for a credit card company to raise rates on their existing balance. Issuers can increase the cost of small business debt whenever they want, however.

That, as you might expect, presents a number of problems for the plastic-wielding small business community. For starters, it’s impossible to allocate capital, control margins or plan an expansion when you don’t know how much your debt is going to cost at any point in time. 

Compounding this issue is the fact that small business and personal finances are one in the same in the minds of major credit card companies. All the major issuers hold small business owners personally liable for any unpaid balances, and most report business credit card account information to users’ personal credit reports. Small business owners must therefore take their families into account when deciding whether or not to carry a balance on business plastic.

Looking for Signs of Change

Common sense would seem to indicate that an extension of the CARD Act to the small business community is only a matter of time, considering the close ties between personal and business finances and the amount of lip service that politicians pay to small business owners. 

Unfortunately, the Small Business Credit Card Act of 2013 has a 1 percent chance of being enacted, and the issue of equal credit card rights seems to be losing momentum overall. While a number of major issuers took it upon themselves to proactively extend key CARD Act protections to their small business credit cards in the first couple years following the law’s passage, no significant changes have been made in the past two years.

Bank of America continues to be the most small business friendly credit card issuer by a wide margin, as it is the only one to have given business card users the CARD Act protection against arbitrary interest rate increases. Most major competitors lag far behind, having extended only a couple relatively rudimentary aspects of the law.

Making Do In the Current Environment

Small business owners these days have a couple options as far as their company credit cards are concerned. On the one hand, they can use a single Bank of America credit card for all business transactions. The Bank of America Cash Rewards for Business MasterCard is currently the best offer for that option, giving users 0 percent interest on new purchases for the first nine months as well as 3 percent cash back at gas stations and restaurants, 2 percent at restaurants and 1 percent everywhere else.

The other option is known as the Island Approach. It entails using multiple credit cards, each designed to provide the best possible terms on a certain type of transaction. For small business owners, that would mean getting a business rewards credit card for everyday purchases and a 0 percent general consumer card in order to safely carry debt from purchases you cannot pay off in full within a month’s time. The beauty of this strategy is that you’ll have far more options from which to choose (not just Bank of America credit cards), and you have the freedom to get two cards with excellent terms, as opposed to a single card with mediocre terms across the board.