How business cards can impact your bottom line

Careful: They lack the protections offered by consumer cards

By Erin Peterson

Commercials advertising the wonders of business credit cards often showcase scrappy and loveable business owners who tout their card's generous credit limits, cutting-edge budgeting tools and considerable flexibility. The implication is that their card allowed them to build a thriving business and create their own American dream. What they don't share is the card's fine print -- the complicated rules and limited protections that, if misunderstood or used improperly, can sour the most optimistic entrepreneur's mood.

When the Credit CARD Act was passed in 2009, it required credit card companies to change their practices in a variety of ways that generally made cards less expensive -- and confusing -- for consumers. But the array of new regulations, which prevented sneaky practices such as double-cycle billing and tamped down runaway interest rates, don't apply to business credit cards.

That can mean trouble for the 59 percent of small businesses that say they use a business credit card, according to a 2012 survey from the NFIB. They must be more vigilant than the average consumer to make sure that they're not slapped with extra fees or getting unexpected interest rate hikes, says Molly Brogan, spokeswoman for the National Small Business Association. "You've got to read through the terms, look through your statement and check the due date every single time," she says.

The fine print in your terms of agreement might show that you're paying far more than you would if the charges had gone on your personal credit card. See Business card comparison chart for details.

 For example:

• U.S. Bank, Citi and Discover offer business cards with terms that allow the companies to apply payments to balances with the lowest APRs first (often from generous introductory interest rates), while higher APR balances will continue to rack up costs. That billing practices is banned for personal cards.
• Chase has rules for some of its business cards that state that anyone who receives a default rate (often as the result of late payments) may have the rate applied indefinitely. For personal card users, such default rates can be "cured" with six month's worth of on-time payments.
• Citi has a universal default clause for its business cards, which means it can use information from other accounts to raise rates at any time, for any reason. The CARD Act, for the most part, does not allow card companies to raise rates for problems unrelated to cardholder's account.

While it may seem unfair that business owners are subject to different rules than individual consumers, Nessa Feddis, spokeswoman for the American Bankers Association trade group, notes that they're two distinctly different types of customers. Consumers might not have vast amounts of financial education, but business owners must have more than rudimentary knowledge of the subject. "Congress assumes that people in business have a certain level of sophistication and business acumen," she says.

For Brogan, the financial sophistication of a given credit card user shouldn't make a difference. "I think the rules [from the CARD Act] should apply to everybody," she says. "It's true that small businesses can be riskier, but at the end of the day, what card companies are [typically] using to either approve or deny a credit card is the owner's personal credit score. And it's that individual person who's on the hook."

That said, there is an array of other services that business owners use with their credit cards that simply don't apply to individual users. Many business owners, for example, take advantage of services such as tailored spending reports, extra cards for employees with individual spending limits and custom payment terms.

Kevan Chapman, a spokesman for NFIB, adds that businesses often have more significant needs for credit as well. "Small business owners who use business cards tend to be larger employers and tend to charge significantly more to their card than users of personal cards," he says.

Weigh personal vs. business card
For solo small businesses, however, the protections of a personal card may outweigh the perks of a business card. Data released by the NFIB in January 2012 suggests as much: Businesses that report using personal credit cards jumped from 42 percent in 2009 to 49 percent in 2011, while the use of business cards has dropped from 64 percent in 2009 to 59 percent in 2011.

In many cases, the credit card companies are making changes so that business card terms more closely mirror those of personal cards. Discover spokesman Robert Weiss says the company's business credit cards offer a number of protections. "Our business cards are compliant in several areas within the CARD Act, including cancellation, reviewing policies after six months, on-time payments, and ability to pay," he says.

Chase's Ink cards also have an array of protections and improvements, including fixed statement and payment due dates, no double-cycle billing and no universal default clauses. "Ink from Chase voluntarily made changes to give small business customers more financial control," says Rob Tacey, Chase spokesman.

Of course, all of this is moot for the business owner who stays on top of bills and uses a card only for convenience -- and this, it turns out, describes many of them, says Chapman. "Most small businesses do not carry a balance on their cards, [and pay] them off in full each month."

Published: April 4, 2012

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