Small business is the backbone of the American economy, right? Well, you wouldn’t guess that based on the way credit cards are regulated these days.
Even though banks review small business owners’ personal credit reports when they apply for company credit cards and then relay usage information to these same personal credit files — and even hold small business owners personally liable for any debt they might incur — cards branded for business use were excluded from the landmark Credit CARD Act of 2009.
You might assume there was a good reason for the distinction between general-consumer credit cards and small business credit cards under the reformatory law that has revamped consumer rights and infused the personal finance space with transparency. But there isn’t one.
“Politicians wanted to appease the credit card companies and give them another revenue stream that was taken away by new consumer regulations,” says Dr. Peter Nigro, the Sarkisian Chair in Financial Services at Bryant University. “Sad but true.”
The average person might also assume that this regulatory imbalance is no big deal. But 40% of people also grade their knowledge of personal finance at a “C” level or below, and we seem to have rather short memories. Despite the fact that widespread consumer overleveraging helped make the Great Recession as severe as it was, we’ve emerged from the downturn with plastic in hand, racking up roughly $82 billion in credit card debt in 2011 and 2012 and putting ourselves on pace to add $47 billion this year.
If we haven’t learned our lesson about the dangers of becoming overly reliant on credit card debt, it’s safe to say that many of us have already forgotten about the unfair, predatory practices that certain banks once used to milk their customers for all they were worth.
Ordinary consumers no longer have to worry about arbitrary interest rate increases on existing balances or having their payments funneled toward their least expensive debt in order to keep more profitable balances around longer. We don’t have to deal with shady accounting practices that allow issuers to calculate finance charges based on average balances held over a two-month period; we don’t have to see penalty rates take effect on all of our accounts simply because we missed a payment on one of them.
But most small business owners do.
The major credit card issuers have taken varying measures to correct this unfortunate situation, but only Bank of America has extended all of the most important CARD Act protections to its cards branded for business use. The choice in the minds of many is therefore whether to sacrifice selection when choosing their company credit card or to deal with the pitfalls of debt instability.
But help could be on the way. The Small Business Credit Card Act of 2013 was introduced to Congress last month, and if passed, it would extend the 2009 law’s consumer protections to business credit cards. It probably won’t make it, though, if recent congressional performance is any indication.
The bright side is that there are measures small business owners can take in the meantime to maximize the value of their credit card terms, as well as garner user protections where they’re needed most.
The general idea is called the Island Approach, and for small business owners, it would involve using a 0% general-consumer credit card for financing purposes and a business rewards credit card to handle everyday expenses. This would afford them not only debt stability, but also the ability to earn rewards on important company expenses like office supplies and telecom services, as well as benefit from the unique expense tracking features offered through business credit card accounts. Plus, this setup would also provide built-in budgeting assistance, since the presence of finance charges on an everyday account would serve as a reminder that current spending levels are perhaps unsustainable.
But at the end of the day, small business owners shouldn’t be forced to take such extraordinary steps. Roughly 90% of small business owners use plastic, and nearly 40% use it for funding purposes, each year, according to the National Small Business Administration.
If not for their direct benefit, we should correct the obvious regulatory imbalance in which we’re currently mired in light of the fact that small business owners employ nearly half of the private workforce in this country and are responsible for more than 60% of the new jobs added over the past two decades. Trampling on the rights of the small business community could ultimately be one of the straws that breaks Uncle Sam’s economic comeback. This is an important issue that we need to address sooner rather than later.
Odysseas Papadimitriou is CEO of the credit card comparison website CardHub as well as the new personal finance social network WalletHub.