What You Need to Know Now About Business Credit Card Changes

What You Need to Know Now About Business Credit Card Changes Gerri Detweiler, a financial education expert and co-founder of the website BusinessCreditSuccess.com, explains your options now that business credit card issuers are cutting credit lines, raising interest rates and even closing accounts.

Chris Bjorklund: Many business credit card issuers are cutting credit lines, raising interest rates, and even closing accounts. What can the business owner do? We’re going to talk about some of your options with Gerri Detweiler, the co-founder of the website, BusinessCreditSuccess.com. She is a financial education expert and the author of several books on business and consumer credit. Gerri, you’ve been watching the credit industry for a long time now, at least two decades that I know about and this last year, just seems particularly challenging for consumers and businesses when it comes to credit, yes?

Gerri Detweiler: Absolutely. In fact, I would say that this last year has had more change than the 19 years before that I’ve been following the credit industry. So we’ve seen some major changes. One is a shift from lenders trying to focus on maximizing profits to them trying to minimize their risk so they’ve many lenders that were very aggressive in the past who’ve become very conservative. In addition, the business credit card market has really been affected by a large number of small business owners who have been unable to pay their bills and so that’s affected also those who can and do pay their bills on time. And we can talk about some of those changes and then finally FICO which creates the majority of the credit scores that are used in the country certainly for personal credit; they’ve instituted some major changes to their scoring system. So we’re seeing a lot of changes but it’s not all bad news. I mean, there is opportunity out of this crisis and I think that’s where we’re starting to see some new innovative lending solutions that hopefully will take root and grow over the next decade.

Chris: Well, let’s dig in a little more to that first point you mentioned which is how many lenders are shifting their focus from making a lot of money and increasing profits to managing risk. What does that mean for business owners? How does it impact them?

Gerri: I think anyone who’s been in business for a while can probably recall that even just a few years ago, it was pretty easy, if you had decent credit, it was pretty easy to get business credit cards, for example and business lines of credit. But these days, just paying your bills on time and having some money in the bank isn’t enough. You can’t go by the old rules. Lenders are seeing much higher losses than they have in the past and they also, because of these losses have to make sure that they’re playing by the rules when it comes to the regulatory requirements that the government agencies require them to meet. So even if you’re making your payments on time, you could see your credit lines go down. You could see them frozen. You could see your interest rates go up and that isn’t necessary because you’re being singled but again because the lender may overall be having issues with other borrowers that may mean that you’re affected. It does mean that as a borrower, it is extremely important, more important than ever to be very proactive about talking to your lenders so staying in touch with them. If you’re doing things well, you’re paying on time, keep talking to them about how your business is going. If you’re having trouble, don’t try to avoid that conversation. Reach out to them right away because the sooner you do, the more options you have to try to work something out. You definitely don’t want to wait until you’ve missed a payment to talk to your lender. And there is some good news here and that is that less credit while it may seem restrictive, it means we have to do more for less. We can’t just throw money at a problem and so, if you’re a small business owner, it means that some of your competitors who may, for example in the past have just been raising money or borrowing money and throwing it at advertising or other ways of getting their name on the market, may not be able to do that and so that gives you some opportunity, if you can play lean and mean to really take some market share in this market. And the other thing I think is really important is managing your own receivables to reduce risk. So if you’re a business owner who traditionally has extended credit or terms or maybe you’ve done work and gotten paid later, I think it’s really time for you to look at whether you’re evaluating the credit risk of those businesses that you’re expecting payment from so you don’t get stuck holding the bag if they can’t pay. And so, if you’re a business owner who for example, has never looked at a business credit report on any of your clients or partners, now is the time to start doing that.

Chris: Gerri, I know this is maybe a little side question here but with regard to the credit lines being frozen or cut in half, one strategy that I’ve heard discussed informally is the idea of tapping into the credit line before you lose it and just use it, put it somewhere else. Is that a good strategy just so you really do have that cash even though you maybe don’t need it right now?

Gerri: Possibly, the question is the cost of that credit line and whether you can afford to carry that cost for some period of time without eating too much into your profits. Unfortunately interest rates although interest rates in the economy are low, interest rates borrowers are paying tend to be higher because of the losses and so you have to take into account the cost of that money if you’re going to use that strategy. Now one thing I do recommend is if you are sort of tight on cash flow, I would suggest that you stash some cash rather than paying down all your debt right away again if you can afford to do that because what we see sometimes especially with the smaller business owner is that they try to pay down the credit card, they don’t have much cash in the bank then the credit card closes its credit line or maybe the bank closes the credit line and pretty soon you have nothing to fall back on. So you want to have one or the other, either credit available or money in the bank and preferably both.

Chris: I like that. Stash the cash. Definitely something I’ll remember. Okay, Gerri, it appears that some of these issues in the credit market have affected the small business credit card issuers as well. So what’s happening here?

Gerri: Business credit cards in particular have had some very high rates of default, even higher than some of the consumer credit cards. An example would be Advanta which until recently was one of the top small business credit card issuers and they ended up closing all credit lines for all their customers even those who were paying on time because of defaults they’re having. We’ve heard a lot of reports from business owners who have seen their credit lines cut. I talked to one recently, for example, his credit line went from $15,000 to $1,000 overnight and he had never missed a payment and again, I’ll emphasize that he’s not necessarily being singled out but these issuers are looking at their portfolios overall; they’re looking at the potential risk; and they’re also looking at the regulatory requirements that they minimize that potential risk and so, segments of customers are finding that they may have their credit line closed. So one of the things that I would emphasize there is again, being proactive. If your credit card issuer lowers your credit limit or cuts your credit line, if you have good credit, I would be on that phone right away trying to get that line reinstituted and the example I just gave of the business owner who went from $15,000 to $1,000 he called them up and it wasn’t easy. He had to talk to three, four, maybe five people but eventually he reached someone who could help him and because he really had excellent credit and a good payment history, he ended up with a $25,000 credit line when all was said and done. So it wasn’t necessarily a bad thing but you have to be patient and persistent if that kind of scenario happens to you. The other thing you want to look at is liability issues. So for example, if your business has several employees or a number of different executives, you want to look at…find out whether you are personally liable for the bills on your business credit card. Most small business credit cards that are issued to groups of usually four or fewer employees, do carry personal liability for the executives or owners of the company and so that’s important if something happens and the company is not able to continue, want to know IBM hooked for all these charges including the charges of other employees in the business, if the business doesn’t succeed. So that’s something you want to investigate before that happens, if possible, you do have a credit card account and you sign an application and you want to keep a copy of that application or at least your card holder agreement, if you could see if the liability is mentioned in there. The other thing you may need to look at is alternatives if for example, your credit lines are cut and you no longer have say a business credit card for business travel or things like that. There are a lot of flexible options online. You can look for example, PayPal has something called secure payments where you can actually generate a credit card number for every online purchase including recurring online purchases even if the website does not accept credit cards. So that could be an alternative to having a credit card to make online purchases. For travel, you may need to look at a credit card that has a security deposit. It’s called a secured credit card and what you do is it’s sort of like when you rent an apartment, you put a deposit up for the apartment, here you put a deposit in the bank that secures the credit card and then you can use that for travel. I do recommend a secured credit card for travel over a debit card and the reason is some hotels and some car rental agencies either will not accept a debit card when you try to purchase that travel or they may check your credit report every time you use the card. So one business owner told me that he was traveling a lot for business using his debit card, when he rented a car and each time, it placed an inquiry on his credit report and that lowered his credit score slightly.

Chris: Well so, yeah, some of this is all in the fine print of our credit card agreements and when we sign, when we sign for things, we don’t realize how this all plays out in reality.

Gerri: That’s right and when times are tough, it can be pretty stressful to find out, for example, that you’re on the hook personally for a $50,000 credit card bill. That could certainly add a lot of financial stress.

Chris: Gerri, what about business owners who have problems with their business credit cards? Don’t some of them start turning to their own personal credit cards and what do you think of that approach?

Gerri: Yeah, it’s very common for business owners, especially with small businesses, to mix business and personal credit. If at all possible, you want to try to keep the two separate and the reason is typically business credit cards, as long as you don’t default are not reported on your personal credit and so that keeps that debt off your personal credit report and off your personal balance sheet and as any business owner will tell you, lenders and banks and vendors love to see as much personal credit information as they can get because that’s going to help them understand what kind of a credit risk you may be as well as what kind of backup they may have if the business can’t pay its bills so it is important to try to keep your personal credit strong. So if you can keep it off there, if you cannot for some reason, then your best bet is to try to choose installment loans over credit cards if you’re looking at your personal credit. So, for example, instead of a credit card, transferring a credit card balance from a business card to a personal credit card, you might get a personal loan from your bank or your credit union and use that because installment loans don’t hurt your credit quite as much if they’re maxed out as say a personal credit card that has a high balance compared to the credit limit.

Chris: Good suggestion. Now, it seems as though you’ve touched on this a little earlier but it just seems as though even borrowers who have pretty strong credit scores are feeling the pinch and credit scores are changing. Can you tell us about that?

Gerri: Absolutely. What FICO says and FICO is the creator of the credit score that’s most widely used in the industry, they did a study in October and they studied consumers whose credit lines have been decreased and they found that the average or the median score of consumers who had seen their credit line decrease was 760. Now if you know FICO scores, a 760 is a very strong FICO score even today. So again, I want to emphasize that just because you’re doing things right doesn’t mean you won’t be affected by what’s going on in the industry out there. What FICO has done over the past year is they’ve introduced an upgrade to their credit scoring system. I compared to sort of the upgrade from Windows XP to Windows Vista although hopefully with fewer problems. It’s sort of a similar type of upgrade that the same operating structures underneath it but it does have some differences. It’s called FICO 08 and in August of 2009, it’s just gone to all three major credit bureaus, so all three credit bureaus are using FICO 08 and that means lenders are using it as well. And what FICO 08 does is it tries to do a better job of predicting risk for consumers so some consumers are going to see their credit scores go up even though they’ve done nothing differently under this new scoring system. Some will see them go down and it’s hard to know which category you’re going to fall into just because credit scores are so complicated and the formulas…it’s FICO secret sauce, they don’t tell us what the formula is exactly. But one thing I think that is really good about it is that any small negative account, let’s say you have a $50 co-pay on a health insurance plan that you didn’t realize it didn’t get paid and it went over to collections, anything under $100 that goes to collections will be ignored under FICO 08. In addition, it’s going to group delinquencies so let’s you run into a rough period just for about six or eight weeks and you fall behind on a few bills but then you get caught up and you stay caught up. Under the current scoring system, before FICO 08, that might hurt you more than it would under the new scoring system where any problems within a short isolated period of time will receive less weight as time goes on. So in other words, by catching up and continuing to pay your bills online, our bills on time, you’ll be able to heal your credit under the new system I think more easily than you would have in the past.

Chris: Well, that’s pretty good news then.

Gerri: It could be good news. On the other hand, I think some consumers are going to find that the change is simply because the system has changed may find they have a lower FICO score so it is helpful to monitor it. The other thing we’ve been seeing is that a lot of issuers are seeking out borrowers with higher credit scores. So for example, at credit.com whom I worked with, we’ve seen that the segment of the market that’s considered what we call sub-prime, consumers who have maybe FICO scores of about 640 or below…high 500, those who have really had some financial problems, they’ll really find it very difficult to borrow at any kind of reasonable terms these days. Consumers who a year ago had a 720 FICO score and were considered gold or it was pretty easy to get what you wanted, now find they may need a 750 to 760 FICO score or higher so the scoring requirements for those best terms have gone up. So anyone who hasn’t checked their personal credit report and their credit scores, I would say this is a good time to do it. Check them, see it, make sure everything’s accurate and complete and then monitor to make sure that they don’t change to something that doesn’t pop up that hurts your credit scores.

Chris: So what is all the good news in this?

Gerri: Well, the good news is again, innovative lending. We’re seeing social lending take off…social lending or peer-to-peer lending or these websites where you can actually go in and make a loan request and other people rather than financial institutions will bid to lend you money and that can be really good deal. It offers a lot of flexibility and opportunity. We’re also seeing a lot of return to local lending so we have community banks, credit unions, vendor financing…all of those arenas are still really seeking borrowers, good credit-worthy borrowers but they’re still seeking out borrowers even in this economy. So if you’ve sort of ignored your local bank or credit union, you may want to take another look and see what they can do for you there. And then, finally as I mentioned earlier, for those businesses who do play lean and mean during this economy, there’s going to be so much opportunity with other businesses not succeeding, you have the opportunity to gain market share so this is the time to really take advantage of that.

Chris: Gerri, you mentioned your being a credit adviser for credit.com. That’s a personal finance website?

Gerri: That’s correct and we also list business credit cards on our website as well and I’m also co-founder of a website called BusinessCreditSuccess.com which focuses on businesses credit issues.

Chris: And your latest book? You’ve got to give us that.

Gerri: My newest book is Reduce Debt, Reduce Stress.

Chris: That sounds like a good idea for all of us. Gerri Detweiler, thanks for joining us on the AllBusiness podcast.

Gerri: Thank you.

Chris: Gerri Detweiler is the co-founder of the website BusinessCreditSuccess.com. I’m Chris Bjorklund, thanks for joining us for this AllBusiness podcast.