No Relief for Small Business Cardholders

Credit-card reform doesn't apply to small business cards, which more companies are relying on as loans have dried up

When the credit card reform law takes effect, business cardholders like Joseph Rosmann won't get relief Chad Coleman/Bellevue Reporter

By John Tozzi

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Joseph Rosmann thought he was a model small business credit card customer. A 65-year-old general contractor in Bellevue, Wash., Rosmann typically charges between $2,000 and $4,000 in expenses each month on his Chase card. He carries a balance of between $7,000 and $8,000 as he waits for clients to pay, and he makes well over the minimum payment each month. His six-year-old high-end renovation business continues to grow despite the soft housing market, and he expects to bring home $70,000 in net income this year on revenues above $150,000.

So Rosmann was surprised—and angry—when he got a notice in the mail from Chase (JPM) May 27 saying his interest rate would increase from 12.24% to 15.24% on his existing balance and all future purchases, starting with his next billing cycle. The notice said that the change is "in response to market conditions and to maintain profitability on your account." Rosmann must close his account, the only credit card his business has, by June 22 if he wants to opt out of the rate increase.

The sweeping credit-card reform law President Obama signed May 22 is intended to protect most cardholders from practices like changing terms on short notice and retroactive rate hikes. But when the law takes effect in February, business cardholders like Rosmann won't get the same relief. That's because the Credit Card Accountability Responsibility & Disclosure Act doesn't apply to small business cards, which companies increasingly rely on in lieu of traditional financing. About 11% of all Visa (V) and MasterCard (MA) purchases are now made with small business credit cards, up from 3% a decade ago, according to David Robertson, publisher of the credit-card industry newsletter The Nilson Report—and that doesn't count volume by American Express (AXP), one of the largest players in the small business segment.

"A Good Step Forward"

Attempts in both houses of Congress to explicitly include businesses with fewer than 50 employees failed, but the law did order the Federal Reserve to examine the use of credit cards by small businesses and recommend protections to Congress within the next year. Todd McCracken, president of the National Small Business Assn., which has long advocated stricter rules for credit card lenders, calls the law "a good step forward" but hopes regulators will extend the rules to commercial cards.

Still, many small business owners use personal cards for business purposes. They'll see an end to retroactive rate hikes and double-cycle billing (calculating interest and fees based on the balance going back two months, even if earlier charges have already been paid off). Credit-card companies will have to send bills at least 21 days before they're due, give 45 days' notice before rate increases (rather than the current 15), and 30 days' notice before closing an account. In addition, card companies won't be able to raise rates in the first year after a cardholder opens the account.

While the new protections will help borrowers in the long run, some business owners fear that credit-card companies' response to the new law will make things even worse.

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