The Credit CARD Act of 2009, which took effect Feb. 22, 2010, won't help owners of small-business credit cards. The new law applies only to consumer credit cards.
As many as 59 percent of small businesses in a spring 2009 survey reported that they used credit cards to finance their firms during the previous year, according to the National Small Business Association, or NSBA.
Like consumers, many small firms that use credit cards have already seen negative changes to their accounts. The NSBA survey found that 63 percent of respondents reported that their interest rate increased in the past year, and 41 percent said their credit limit was reduced.
The law offers no protection from the practices banned or restricted under the law, such as rate hikes on existing balances. Issuers may or may not choose to extend the same rules to their business credit cards.
"They may even be at more risk now simply because if issuers can't raise rates on consumers, they may decide that small businesses need to help make up for that," says Gerri Detweiler, personal finance adviser for Credit.com.
Recent research from the Pew Safe Credit Cards Project found that rate increases on existing balances and "hair trigger" penalty rate increases were costing consumers at least $10 billion a year. The CARD Act reined in these practices Feb. 22.
Shifting business card spending to a personal card in order to be covered by the CARD Act may also prove a bad idea.
The Credit CARD Act amends the Truth in Lending Act, which doesn't apply to "an extension of credit primarily for a business, commercial or agricultural purpose."
In other words, piling business expenses onto a consumer credit card could render it a business card under the law. This gray area of the law could impact a lot of small-business cardholders. A whopping 86 percent of small firms say they use their consumer or business cards primarily or exclusively for business purposes, according to the 2009 National Small Business Association survey.
"The law is vague enough and specifically cards that are primarily or exclusively used for business aren't included in that," says NSBA spokeswoman Molly Brogan.
In addition, blending personal and business purchases on a consumer credit card can create accounting issues. "If you keep all your business purchases on one card, you likely can deduct the interest and the fees for that card," says Detweiler. "Once you start commingling personal purchases, any accountant will tell you it gets pretty hard to distinguish how much of the balance is due to personal purchases and how much is due to business purchases."
The business debt would also show up on your personal credit report, and the surge in debt could lower your credit scores. An important factor in FICO scores is the usage of available credit on revolving accounts. Increasing this ratio will cause your score to drop.
Unless an account is delinquent, small-business cards don't usually appear on personal credit reports. There is an exception to that: Capital One-issued cards. Capital One spokeswoman Pam Girardo says that the bank recently began reporting small-business loan information to business and consumer credit bureaus.
Business card accounts that show up on personal credit reports get treated like personal debt in terms of the credit score.
What to do
Make sure to open all communications from the business credit card issuer so that you can make adjustments for account changes.
Have a back-up plan, suggests Detweiler. She says this might include having a personal card with no balance on it, to which you could transfer a balance, or a personal loan.
Some purchases shouldn't be funded by a small-business credit card, says Bob Seiwert, senior vice president at the American Bankers Association Center for Commercial Lending and Business Banking. "If you're buying a piece of equipment, and you can't pay that off within the normal billing period, you shouldn't be financing that piece of equipment with a business credit card. You should go to your bank and get a term loan for it."
For additional information, read the new series of white papers on small business borrowing and banking from the American Bankers Association.
Staff reporter Leslie McFadden covers credit cards and scores. She's based in Bankrate's New York office.
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