Posted by: John Tozzi on April 9, 2010
In this week’s issue of Bloomberg BusinessWeek we report on how credit card reform left small businesses behind — and how card issuers are reacting now that they play by one set of rules with consumer credit cards and another set with business cards. One aspect the story didn’t cover: Interest rates rising for small business cards.
The average APR across 33 small business cards from major issuers increased from 11.04% to 12.32% between August 2009 and March 2010, according to data from BillShrink, a Web site that tracks rates and terms on credit card agreements. That’s looking at the lowest, non-introductory rate published on card issuers’ Web sites, according to Samir Kothari, BillShrink’s co-founder and vp of products. In the same period, rates on the consumer cards BillShrink tracks went from 12.15% to 12.53%—though rates on consumer cards may have started going up earlier, since the CARD Act was passed in May 2009.
Banks warned that credit card reform would mean higher costs for consumers. This is from a backgrounder that the American Bankers Association has on reform:
The new legislation restricts the ability of credit card companies to price based on the individual risk of the customer. As a result, the system becomes a one-size-fits-all model, meaning that interest rates will likely increase for nearly everyone, including those with a good credit history, as those who successfully manage their credit will be subsidizing those who have not.
First of all, the regulation does not end risk-based pricing. Banks can still charge higher rates to customers with bad credit — they just can’t raise the rates retroactively on existing balances. Except that protection doesn’t apply to small business cards. So why are interest rates on those cards rising?
The ABA’s Peter Garuccio says the economy and higher loss rates have pushed up APRs. Though he didn’t have any data specific to business cards, Garuccio says in an email that “the charge-off rate in the consumer credit card market reached an all-time high of over 10% last summer and has remained in that neighborhood ever since. With loss rates that high, the cost of making credit available necessarily goes up.” He also says the group “maintained all through last year that increases in interest rates for consumers were being driven largely by the economy, and secondarily by the CARD Act, not just the CARD Act itself.”
If Congress or the Fed decides to extend credit card reform to cover small business cards, that could result in lower credit lines, annual fees, and less generous rewards, says Dennis Moroney, an analyst at the payments industry consultant TowerGroup. But card issuers still see small business cards as a growth market. Though last year may have been a hiccup, small business card purchase volume has consistently grown by double digits in recent years, according to Ken Paterson, an analyst at Mercator Advisory Group. Issuers are still competing for new business, and that competitive pressure should check some cost increases that banks predict would result from reform.