How the CARD Act Increased Small Business Credit Card Costs

Card issuers increase credit card rates for small businesses and corporate executives as consumer credit cards receive more national consumer protection.

Small businesses' credit card rates have increased more than 30 percent in 2010. Why? According to a BillShrink study, this has been card issuers' response to the Credit Card Accountability and Responsibility Disclosure Act of 2009 (CARD Act), which does not apply to commercial credit cards used by small business owners and corporate executives.

Business Funding Through Small Business Credit

Brian Moynihan, CEO of Bank of America, speaking to investors in September 2010 stated: “[w]e currently estimate over time through these and other items we are working on that we will have the ability to offset a substantial majority of the revenue from the various regulatory changes.”
In 2009, 83 percent of small businesses used both their business and personal credit cards to finance business expenses, according to a Federal Reserve report issued to the U.S. Congress. In an atmosphere where commercial lending has tightened, many small businesses have used credit cards as a short-term capital solution. As a result of offsetting strategies by banks, business credit card shoppers should compare with a keen eye when selecting commercial credit card products in today's market.

The Higher Costs of Commercial Credit Cards

“We predicted earlier this year that small businesses would be subject to rate increases as the banks try to make up for lost consumer revenue resulting from the CARD Act,” said Schwark Satyavolu, BillShrink CEO. “Since small businesses aren’t protected, they appear to be an easier target for card rate hikes.”

Additionally, according to a Pew Health Group's Safe Credit Cards Project study, by second quarter 2010, transfer fees and cash-advance fees for business credit cards rose to 4%, up from 3% in July 2009.

Credit Card Issuers Increase Marketing to Business Credit Card Holders

While the CARD Act banned a variety of credit card issuer fees, such as excessive late charges and overdraft fees, it appears that banks have responded in part by increasing its marketing of professional and small business credit cards.

According to the London-based market research firm Synovate, during the first quarter of 2010, credit card issuers have increased their commercial credit card offers by 256 percent compared to first quarter 2009. That included 47 million business credit card offers, making it easy for small businesses to secure credit card funding in lieu of traditional commercial lines of credit or other business loan products.

How to Find the Best Business Credit Card Offers

Generally, the best business practice is to pay off balances on revolving business credit cards monthly to avoid associated costs. Also, depending on your business operations, consider the availability of credit card options such as card issuers who co-partner with business travel reward programs. This allows small businesses with recurring travel expenses to recoup some of the value of having a business credit card.

Additionally, beware of “free” checking accounts. Many of these accounts are conditionally free. Some banks may require a certain number of monthly transactions or limit bank customer service to electronic and ATM banking. When such conditions are not met the status of these accounts may magically become “unfree”.

Business owners should compare and be clear on all business credit card features. Some of the most important transactional costs on credit cards are from the following terms:

• Annual fees
• Overdraft fees
• Maintenance fees
• Opting to receive paper statements
• Opting to visit human tellers
• Receiving images of canceled checks
• Minimum balance requirements.

“In today’s tough business lending environment, some small business owners may benefit from increased access to these professional cards,” said Eileen St. Pierre, personal finance specialist at Oklahoma State University Cooperative Extension. “As consumers, be aware of the information you are receiving and be very cautious before signing up for any new credit cards.”

General disclaimer: this article is for information purposes only and should not be substituted for legal or other professional advice.