If your company fails, your credit card rate can rise
Your Business Credit
Elaine Pofeldt is a journalist whose articles on entrepreneurship and careers have appeared in Fortune, Working Mother, Money and many other publications. She is a former senior editor at Fortune Small Business magazine and an entrepreneur herself, as co-founder of 200kfreelancer.com, a website for independent professionals. She writes "Your Business Credit," a weekly column about small business and credit, for CreditCards.com.
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Dear Your Business Credit,
I ran a business, but it folded. My credit card issuer
said I was responsible for the card balance at a new rate of 26.95 percent. Is
this correct? -- Ronald
I am sorry to hear that you still have to cope with debt
from your business after it has closed. Many business owners find themselves in
a similar situation, and it can be very burdensome.
You didn't mention whether this is a consumer credit card or
a small business card. Even if it is a business card, you're still most likely personally
responsible for the debt. When I ran your situation past Michael Jeffrey Gunderson,
a bankruptcy attorney with Gunderson & Tharp in Chicago, he pointed out
that the vast majority of business credit cards obtained by individuals through
traditional retail banks require personal guarantees.
"The fact that it's a 'business' credit card is almost a
misnomer in that it's the person's personal credit report and the person's
personal guarantee that back up the card," he explained in an email. "It's
likely in this case that the membership agreement provided a clause like this,
and almost certainly there is a personal guarantee. Any credit obtained in a
similar manner to a personal card (online, mail-in application, phone
application, etc.) even if labeled a business card, is going to be personally
When you personally guarantee a debt, you are legally
responsible for it.
As to whether your card issuer can raise your interest rate
to 26.95 percent, that depends. According
to the Consumer Financial Protection Bureau (CFPB), there is no federal law placing a ceiling on the interest rate that
credit card issuers can charge. Generally, that's a decision
made by the state where the card issuer has its headquarters. You can check
with the consumer protection agency for that state to find out what
the law is.
Your payment history on this account is also a factor in
whether your card issuer can hike your bill suddenly. If you have fallen
behind, your card issuer may be within its rights.
In May 2009, President Obama signed the Credit CARD Act, aimed
at protecting consumers from abuses such as sudden interest rate hikes on
existing balances if a payment is one day late. Card issuers can now only
increase the interest rate on existing balances if you have been at least 60
days tardy in making a minimum payment -- unless there's an exception that
One major exception is variable rate accounts, whose rates
are tied to an index -- almost always the prime rate. That encompasses most
cards these days. When the Federal
Reserve raises interest rates, those increases are passed on
to variable rate cardholders.
It's also important to note that many issuers don't
give small business cards the same protections as consumer cards under the CARD
Act, since they are not required by law to do so. It's very possible that your
issuer was allowed, under the terms you signed, to increase your interest rate.
Check your card's terms and conditions to see.
If you think your card issuer acted incorrectly in
raising your rate, you can submit a complaint with the CFPB.
Finding a way to make more than the minimum payment can also
help you greatly reduce the interest you pay on the debt in the long run. You
can use the CreditCards.com debt payoff calculator to figure out how much increasing your payments will help you.
Obviously, it is not easy to pay off debts when your
business has just closed, especially if it was your sole source of income.
Looking for creative ways to raise money -- whether by selling a second car
you seldom drive, working two jobs for a while or starting a new business that
will generate quick income without a lot of overhead -- can make a real
difference in your situation. There is a lot you can do to turn things around.
Just as starting your business took a big
commitment, so does paying down the leftover debt. While that's not much fun,
view it as an investment in building the strong credit rating you may need to
get funding for your next business idea. Many entrepreneurs have learned from a
past business failure and gone on to build a successful one. Protecting your
credit score can go a long way toward landing on your feet.
See related: The path to a lower interest rate, Business card benefits outweigh limitations for most businesses, In case of default, business credit cards get personal
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Published: August 5, 2013
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