The Pew Charitable Trusts recently released a study showing millions of individuals and small business owners receive offers for business credit cards each month. While this might sound like a tempting offer for some, you should note that business credit cards are not covered in the Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009. Consequently, those who use credit cards for business or commercial use are faced with high fees and sudden interest rate hikes.
If your business is structured in such a way that you’re personally liable for your business debt (such as a sole proprietorship or partnership), you are personally responsible for the card. Therefore, your business credit card usage is reported to your individual credit report, which means your personal credit could be negatively affected.
Although the Credit CARD Act has made personal credit easier to comprehend, the rules don’t apply to business credit or commercial credit cards. Pew is concerned about these offers because many small business owners are facing potentially harmful practices by credit card issuers. However, two credit card companies are trying to do right by business owners. After taking a close look at business cards offered by 12 of the largest credit card issuers in the United States, Pew found that Bank of America was the only issuer that eliminated sudden hikes in penalty interest rates. Furthermore, Bank of America and Capital One now use payment policies for business credit cards that mirror the ones required for consumers and now apply payments to the highest-rate balances first.
Here are some things you should watch out for when using a business credit card:
Account terms can be changed at any time. The Pew study found that 80% of business credit cards allow issuers to change terms of an account at any time. This differs from the CARD Act, where card issuers are not allowed to change terms during the first year. After one year, the issuer is required to notify a consumer within 45 days and offer the choice to opt out.
- Tip: Pay close attention to your credit card statements. When you get a letter in the mail detailing changes to your account terms, don’t toss the envelope to the side. Read all of your mail so you won’t be taken by surprise when your required minimum payment is suddenly higher.
Penalty fees are unrestricted. The study also found that 73% of business cards had a late fee attached to them and 67% of business cards had an over-limit fee. However, when it comes to cards protected by the CARD Act, consumers are given the choice to opt in to over-limit fees. In addition, late fee penalties must be reasonable. Furthermore, card issuers must not charge a penalty that is higher than the cost of a violation.
- Tip: Keep track of your balances and pay your bills on time. If you have trouble keeping up with payment due dates, set up an automatic payment plan with your bank.
Payments can be applied to lower-rate balances. That’s right; credit card companies can apply your payments to low-rate balances while interest accrues on your higher-rate balances. For example, if you wrote a check from your business credit card account, but you also had a balance on the card, your payment would be applied to your credit card instead of the higher-rate check balance. That means you’ll be in debt much longer. Under the CARD Act, payments are applied to the higher-rate balance first.
- Tip: Unfortunately, until protections are put in place for business credit cards, there’s not much you can do about this one. So until then, read all of your statements closely, and pay attention to any changes.