In late March, Representative Nita Lowey (D-N.Y.) introduced a bill that would impose the same protections on business credit cards as those required for consumers under the CARD Act of 2009. Lowey's bill would bar credit-card issuers from using hard-to-understand pricing structures, arbitrarily raising interest rates, or imposing unfair and hidden penalties on business credit cards, just as they are now barred from doing on consumer cards. While many credit-card issuers oppose this bill, which would block several lucrative business practices, Congress should pass it.
Fairness alone dictates passage. Two years ago, Congress blocked credit-card issuers from employing these practices because it deemed them "unfair." While the CARD Act protections didn't apply to credit cards labeled "business," the industry's practices are either fair or they are not, regardless of whom they affect.
Credit-card issuers argue that business cards are different because they are limited to business activity. However, in a 2010 report to Congress, the Federal Reserve found that "small business credit cards are similar to personal credit cards in many ways," offering many of the same features, including teaser interest rates and programs to transfer credit card balances. Many card issuers operate business and consumer credit cards out of the same business units to exploit the similarities between the types of cards, the report noted.
When business credit cards were introduced four decades ago, policymakers excluded them from consumer protections because lawmakers determined business owners could analyze the cards' risks better than consumers could. At the time, business credit cards were issued only to the largest, most successful private company owners. Today, there are 15.4 million business credit cards, according to a Pew Trusts report. Thirty percent of the 10 million monthly business credit card solicitations go to households with annual incomes of less than $50,000, the report found.
Owners Hold the Credit Liabilities
The Federal Reserve identifies many similarities between business and consumer use of credit cards—not surprising, given that the same individuals are ultimately responsible for the debts of both. Internal Revenue Service data show that 72 percent of U.S. businesses are sole proprietorships, making those business owners personally liable for their credit-card debts. And even when the businesses are not sole proprietorships, credit-card issuers almost always require the owners to accept personal liability for the expenses on the accounts.
Personal credit ratings of business owners are also closely linked to the businesses' receipt of credit cards. The Federal Reserve reports that when business owners apply for business credit cards, the issuers generally look to the credit ratings of the owners to decide whether to approve the applications. When the card holders run into trouble making payments, their personal credit ratings are adversely affected.
Bankers argue that subjecting business credit cards to the same rules as consumer cards will make small business credit difficult to obtain. That argument is flawed: business owners don't generally use the cards to borrow; they use them for transactions. While four-fifths of small business owners use credit cards in their businesses, only 12 percent borrow on these cards—typically about $3,000. Fed data show that less than 2 percent of small business debt is credit-card debt.
Congresswoman Lowey's bill simply extends the CARD Act's rules to business cards. Given the similarities, offering the same protections to both is reasonable. As a basic principle, applying the CARD Act to any credit card for which the holder is personally liable for the debt seems fair.