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When Washington's new credit card rules took effect on Feb. 22, most cardholders got some relief from practices that consumer advocates have long condemned, like raising rates on old balances or applying payments in a way that maximizes interest charges.
Small business owners were the exception. As an amendment to consumer protection laws, the Credit Card Accountability, Responsibility, & Disclosure (CARD) Act did nothing to regulate the fast-growing market for small business credit cards. Unlike corporate charge cards that large companies use to manage expenses, business credit cards function much like consumer cards and are personally guaranteed by business owners, who often carry balances to finance their ventures. Small business cardholders now face a hodgepodge of policies and uncertain prospects for reform.
Business cards account for 15% of all volume charged on credit and debit cards, analysts estimate. The law did direct the Fed to recommend additional protections for these cardholders to Congress by May 22. A bill to cover business cards with CARD Act-style protections has stalled in the House. Small business advocates hope to attach the measure to a future Senate jobs bill—and to pass it before business owners take on credit card debt mistakenly thinking they're protected from retroactive rate hikes, says Molly Brogan, vice-president of public affairs at the National Small Business Assn., which has long pushed for credit card reform. "There's mass confusion," she says.
The banking lobby says giving small business cards the same protections as consumers will curtail credit. Because small businesses are risky and tend to charge more than consumers, issuers will have to cut credit and preemptively raise interest rates if they can't adjust rates later on, says Ken Clayton, senior vice-president of card policy for the American Bankers Assn. "You're merely going to exacerbate that pullback in credit that's already taking place in the marketplace," he says.
Some card issuers are voluntarily giving business customers bits of the same protections consumers now have. On Apr. 1, Bank of America (BAC) announced that it would cease raising interest rates on existing balances in May for its 2 million small business cardholders and add other protections in July. Capital One (COF) included small business accounts in many CARD Act-related changes in February.
Without the force of law, these changes could be reversed by card issuers. And small business cardholders still face penalties such as fees for going over credit limits that issuers are now barred from charging consumers. Kevin Reeth, CEO and co-founder of online bookkeeping startup Outright, has been charged for exceeding the $3,000 credit limit on his American Express (AXP) small business card twice since AmEx abolished such penalties for consumers on Oct. 1. On other occasions, his card was declined—making it difficult to tell when a charge will be approved if he's near the limit. AmEx spokeswoman Rosa Alfonso notes that business owners can avoid over-limit penalties by paying down their balance before their billing period ends.
While card issuers often argue that they need to be able to raise rates on existing balances to compensate for the risk of extending unsecured credit, BofA doesn't expect that abandoning its ability to adjust rates will limit the amount of credit it can extend, says spokeswoman Betty Riess. The bank aims to boost lending to small businesses in 2010, including credit card loans, by $5 billion. Say Riess: "We're trying to make every good loan we can."