Perils of Unprotected Business Credit Cards

With all the publicity of the new protections afforded consumers with the passing of the Credit CARD Act of 2009, business owners can be surprised to learn that the business credit card in their wallet is not covered by the CARD Act. Business credit cards do not fall under the protections of the Truth in Lending Act and the Credit CARD Act of 2009. This means that card issuers can raise rates at will (even on existing balances), bill on any date each month, and squeeze the time frame between the receipt and payment date--all practices that have been banned on consumer cards.

Business cards, however, can offer benefits that are attractive to business owners, such as more flexible payment options, business reward programs, and the ability to detail and break out spending records for accounting purposes. To be fair, some business card issuers voluntarily incorporate many consumer protections into their fine print policies.

Several potential differences you might encounter using your business credit card are below:

    1. Issuers can raise rates at any time and without notice on business credit cards.
      Not only can issuers raise the APR, but an issuer can also apply the new, higher rate to old charges. For businesses, this makes it difficult to plan for the cost of borrowing. With consumer cards, issuers must provide 45 days notice of rate increases and the increase can only apply to new charges. Some card issuers, however, voluntarily comply with the CARD Act's notification and rate increase provisions regardless of whether the card is personal or business.
       
    2. Low "teaser" rates.
      Low introductory rates on a business card can be withdrawn at will by the issuer. For a consumer card, low promotional rates must be offered for at least 6 months.
       
    3. Due date can change every month and smaller payment window.
      Issuers are not required to mail bills to a business card holder within a certain number of days before payment is due, and the payment due date can fluctuate every month. Under the CARD Act, issuers are required to mail the bill at least 21 days before the due date and the due date must be on the same date each month. Some issuers, however, give business card holders 25 days between the date the bill is mailed and the due date, and provide due dates on the same date each month.
       
    4. Unlimited late fees and over-the-limit fees.
      The late fees issuers can charge on business credit cards are unlimited. The CARD Act, on the other hand, caps late fees at $25 on consumer cards but a second late fee in six months can go up to $35. Over-the-limit fees on business cards are also unlimited and cardholders can automatically go over the credit card limit without warning.

 

    1. Payments can be applied differently depending on the part of the balance with the lowest/highest APR.
      With a business card, the issuer can apply the entire payment to the lowest interest balance and leave the higher interest balance subject to adding up finance charges until the lower interest balance is paid in full. With a consumer card, any payment amount over the minimum must be applied to the balance with the highest APR.
       
    2. "Negative" credit reporting.
      Business credit card history may not appear on a holder's or business owner's personal credit report. This can be good and bad for the individual. Some business owners with a good payment history want the business cards to appear on their personal credit reports, however, many issuers report only "negative marks" to the credit bureaus and they do not undertake positive reporting.

 

  1. Personal guarantee.
    Most business card approvals are based on the business owner's personal credit score. Many issuers include a "Personal Guarantee" in the fine print which means the business owner is responsible for repaying the debt even if the business fails.

Despite these drawbacks, business cards may provide business benefits, such as insurance for travel and car rentals, discounts if paid in full within a certain number of days, or an interest-free period. Such benefits may outweigh the potential disadvantages. Read the fine print of your business credit card agreement so that you are aware of your issuers policies as compared to the CARD Act protections afforded individual consumers.