Credit CARD Act Backfires for Small Businesses

Lowell Bike's automotive advice website, MyAutoTips.com, has grown to top $200,000 in revenue in four years. But the success of the Washington, D.C.-based site didn't impress Bike's business credit card issuers.

Over the course of this year, Bike saw his MasterCard's interest rate rise 10 percent, to a whopping 24.99 percent. His American Express card hiked its rate 5 percent, to 20.24 percent. As he paid off balances, the two card companies also cut back his credit limits by a total of more than $15,000, forcing Bike to reduce his company's marketing budget. "It's totally outrageous," Bike says. "I've had these cards for years, and I've never missed a payment."

Federal Law Backfires on Business Owners

Bike isn't the only entrepreneur experiencing discomfort with business credit cards this year. A recent study conducted by the money-saving portal BillShrink found that business card issuers have raised rates by an average of 30 percent since January.

Why the sudden clampdown on business cards? The answer lies in the Credit Card Accountability, Responsibility, and Disclosure Act of 2009. Better known as the Credit CARD Act, this federal consumer-credit reform bill became law in May 2009. Starting in February of 2010, the law imposed restrictions on consumer credit card terms, including limits on what card issuers can charge in late fees and higher interest. The catch? Business credit cards weren't included in the law's protections, giving credit card issuers free rein to make up their consumer card losses with business card rate and fee hikes.

Shortly after the Credit CARD Act passed, small business advocates pushed for a bill, H.R. 3457, that would extend similar protections to small businesses. Introduced in July 2009, the bill remains stuck in the House Committee on Financial Services.

Now, with republicans gaining control of the House of Representatives in this month's election, the effort is likely dead, says Molly Brogan, vice president of the National Small Business Association. That may come as a surprise to the small business owners who hoped a change in Washington would help their cause. But this is one issue in which entrepreneurs are not likely to find a friend in the republican-controlled House.

The cost to business owners is likely to be steep. A study BillShrink conducted in May forecast entrepreneurs will pay $420 million in finance charges they could have saved if the new legislation applied to their business cards.

Card Strategies for Small Businesses

Given that the legislative route is no longer an option, what's a business owner to do about tightening credit card terms? Our experts offer these five tips.

1. Ask for better terms. If you get hit with a rate hike, new fees, or a credit limit cut, first try negotiating with your cardholder, says Issamar Ginzberg, business consultant and author of the eBook Business Credit Secrets. Don't talk to customer service -- instead, ask for the retention department, where executives have more power to change your contract. If traditional channels don't work, Ginzberg suggests trying sites such as GetHuman or CreditBoards to find the best contact names and numbers at your issuer. Or locate executives by searching on LinkedIn, and call them directly. This may seem like a rogue move, but Ginzberg says being the squeaky wheel to managers can get results, as key executives have the authority to make changes, and they're motivated to keep your business. "They have nothing to gain by losing you as a customer," he says.
2. Fight your battle in December. Ginzberg says that by law, finance managers have only 30 days to respond to your inquiry. With vacation time cutting their hours, some managers may simply run out of time to review your file and OK your request.
3. Seek a business card with Credit CARD Act protection. Some banks, including Bank of America, have voluntarily applied Credit CARD Act rules to their business cards. Consider switching to one of these banks for your credit card needs, says Gerri Detweiler, personal finance expert for Credit.com and an
4. Look for cards with low or no annual fees. In one BillShrink study of business credit cards, nearly half of business cards had no annual fee. Only around one-quarter had a fee of $40 or more.
5. Choose a balance transfer over a cash advance. Schwark Satyavolu, BillShrink’s chief executive officer, reports balance transfer fees have declined by 6 percent in the past year, while cash advance fees shot up 16 percent. Signing up for a new card and transferring your balance may lower your interest rate.

Beyond Business Credit Cards

If your business card terms are onerous and you can't find a better offer, consider these other business finance options.

1. Transfer your balance to a consumer card. Your personal credit rating will be affected, but Detweiler says it's an option to consider, especially if you don't need more credit access right now. It's not a move you should stick with long term, but it could be a temporary fix to get a lower rate. "Don't max out the card if you're worried about the personal-credit hit," she says.
2. Consolidate balances. Consider obtaining a traditional bank loan or line of credit at a fixed rate to pay off your existing business cards, Detweiler says. Then you'll be locked in at one rate and can't get hit with increases six months or a year from now.
3. Consider a peer loan. Peer-lending sites such as Lending Club and Prosper offer fixed-rate loans -- usually for three-year terms -- up to $25,000, Detweiler says.

At MyAutoTips.com, Bike addressed his credit dilemma by getting a third business credit card, this one from Capital One, that offered a zero percent interest rate on balance transfers. Because of its lower credit limit, the new card couldn't remove all the debt from his other two cards. What he couldn't transfer over, Bike is paying off as quickly as possible.

The bad news: Unlike most business credit cards, his new card is one of the few business cards on the market that are reported on the business owner's personal credit. But Bike says it's still worth transferring his debt to the Capital One card to eliminate his double-digit interest payments.