Business credit cards offer distinct advantages, but not all the protections of consumer cards
Business credit cards are permitted to play by different rules than consumer cards. What cardholders may not know: The protections offered by the Truth in Lending Act and the Credit CARD Act of 2009 don’t apply to credit cards issued for business.
That means that issuers can raise the rates on existing balances, bill on different dates each month and allow fewer than three weeks to receive and pay bills — practices the CARD Act banned on consumer cards. Neither is there a $25 cap on late fees.
“People really do need to know there are differences,” says Linda Sherry, director of national priorities for Consumer Action. “And the differences could be to their detriment.”
So why use business plastic? Aside from the convenience of separating business and personal finances, the cards often offer features that entrepreneurs deem necessary: more flexible payment options, rewards programs geared toward business needs, the ability to track spending in a business-friendly way, and, sometimes, larger credit lines.
For Maureen Borzacchiello, who started exhibit and event management firm Creative Display Solutions Inc. in 2001, it was also a matter of perception.
Having a business credit card “was very important to me,” she says. “I felt that if I was starting a business, I needed business tools.”
Not all business cards use the same rulebook. Some issuers voluntarily incorporate consumer protections into their policies. Others don’t. Bottom line: The fine print can make a difference in the real cost of using a business credit card.
Here are 10 potential differences you might see in your business plastic:
1. Issuers can instantly raise rates
Thanks to the CARD Act, consumer credit cards have some protection from rate increases. Issuers must give 45 days’ notice of an increase and that increase will apply only to new charges, not the existing balance.
Not so with business credit cards. On them, issuers can raise the APR at will and apply the new rate to your old charges.
“That’s one of the most important things you don’t know: what’s going to be your price of borrowing,” says Josh Frank, senior researcher with the Center for Responsible Lending.
Some cards are voluntarily complying with the CARD Act’s provisions regarding notification and rate hikes. Bank of America, for instance, will not raise rates on existing balances, says Betty Riess, a spokeswoman for the bank. And the company gives business customers 45 days’ notice of any rate increase.
American Express applies rate hikes retroactively with its small business cards, but gives cardholders 45 days’ notice on rate changes, provided that a hike wasn’t the result of late payments or other cardholder actions, says Rosa Alfonso, director of corporate affairs and communications for the company.
2. You could get ‘teased’
With a consumer card, promotional “teaser” rates have to be offered for at least six months and, barring the expiration of a teaser rate, issuers can’t raise your rate during the first year, says Chi Chi Wu, staff attorney with the National Consumer Law Center. With a business card, none of those protections apply, so that introductory low rate on a business card you love today could be gone tomorrow.
3. You could have less time to pay your bill
Under the CARD Act, issuers now have to mail the bill at least 21 days before it’s due. Because the act exempted business cards, that provision doesn’t apply. Neither does the requirement that the bill be due on the same date every month. So the onus is on business card holders to find out how much is due and when every month.
All the same, some business cards are following, or even bettering, the CARD Act on this point. American Express gives small business owners at least 21 days from statement date to payment date, and payments are due on the same date every month, says Alfonso. Bank of America gives business customers at least 25 days between the time a bill is mailed and when it’s due, says Riess.
4. No limit on late fees
The CARD Act capped late fees at $25 or the cost of the minimum payment, whichever is less. Get a second late fee in six months and it could go as high as $35.
Business credit cards’ late fees are unlimited. Combine that with a due date that could change every month and a possibly shorter payment window and the chances for a slipup multiply. Before you apply, ask about the due date, how much time ahead of that date the bill is mailed and how much those late fees are.
5. No limits on over-limit fees
Just as with debit cards, if customers want to go over their limits on consumer cards (and incur over-limit fees), they must have already opted in and given the issuer permission to charge over-limit fees. In addition, for consumer cards, that over-limit fee can’t exceed the dollar amount cardholders went over their limit.
With business cards, issuers can automatically “let you go over the limit and charge you a fee,” says Wu. “And limits on penalty fees don’t apply.”
6. Payments might not be applied the same
With a consumer card, any payment above the minimum goes to the part of your balance with the highest APR. So if you took out a cash advance at a higher rate, that higher priced loan will be paid off first.
With a business card, the issuer can apply the payment to the lowest interest balance — leaving the higher priced part of your loan racking up finance charges.
“It means that, over time, your balance will gravitate toward that higher rate,” says Frank. And if you carry, or plan to carry, two different balances “that can be huge,” he says. But not every card treats this situation the same way.
With Bank of America business cards, the amount of the minimum payment goes to the balance with the lowest APR and “anything above the minimum is allocated to the higher-rate balance,” says Riess.
7. Good marks don’t always appear; bad marks do
Business plastic might not show up on your personal credit history. While some issuers report business accounts on a consumer’s personal credit history, others don’t.
This cuts both ways. Some entrepreneurs want business cards on their personal reports, believing those nice high limits and good payment histories will boost their scores. Other small business owners, especially those who keep high running balances, know that including that credit line could potentially lower their personal credit scores even if they pay off the cards in full every month.
There is one instance in which the card will show up on your personal credit history: if you go into default. You’re not entitled to a positive mark, “but if you get a negative mark, it will go on your personal report,” Frank says.
8. Issuers should ask about your business
Some business card applications look no different from consumer applications. And that’s a problem, according to some consumer advocates.
If an issuer is evaluating you for a business card, the company should be asking about your business, says Frank. In addition, there “should be something on the application that indicates it’s for business use,” he says. Bottom line: If it’s a business card, expect that the issuer will want at least some information pertaining to your business.
There is additional underwriting for small business cards, says Alfonso. In addition to personal salary and credit scores, business owners “can share financials with us, and we evaluate the entire business financial background in order to give them larger lines,” she says.
Anticipate that the issuer will check your personal credit, too. “The vast majority of business cards are based on a personal credit score,” says Frank. In addition, many issuers ask entrepreneurs to personally guarantee the accounts. That means even if the businesses go bust, the owners promise to repay the debts.
9. Business cards, business rewards
What do you get when you cross business cards with rewards cards? Often, it’s a selection of rewards more geared toward business owners.
Some cards offer discounts on business-related products and services. Others may offer rewards that can be redeemed for business equipment or services. Borzacchiello has an airline-branded business card that gives her miles for “every dollar I spend,” she says. “Last year, I cashed them in for business travel. It saved me thousands of dollars.”
When the budget was especially tight one year, she used points from another business card to obtain gift cards for employee holiday presents.
10. Special payment and accounting options
Some business cards offer special payment plans to business owners. Often cards will also allow business owners to create more detailed spending records or break out charges to make accounting easier. And business owners frequently use different cards for different circumstances, matching card benefits to the situation.
For travel, Borzacchiello often reaches for a card that provides insurance for travel and car rentals. She also regularly uses another card that gives her a discount if paid in full within 10 days or — if she pays at least 10 percent of the balance — a 60-day, interest-free float period.
Says Borzacchiello, “That flexibility is huge for me.”
See related: What’s NOT covered by the credit card reform law, Used wisely, small business cards can keep business afloat, 7 things to know about business credit cards, How to keep a small business credit limit from being cut, 6 questions to help you pick the right small business card, Basic rules for business card usage