Does the Credit CARD Act Protect Small Business Owners?

The recession focused intense scrutiny on the credit card industry, as unprecedented numbers of Americans found themselves saddled with overwhelming credit card debt. Washington felt compelled to respond, and in May 2009 President Obama signed a law that protects credit card users by banning practices such as sudden increases in interest rates and sneaky fees. The Credit Card Accountability Responsibility and Disclosure Act, known as CARD, is estimated to be saving consumers approximately $10 billion a year by banning practices like retroactive rate increases and instant rate hikes.

CARD officially went into effect on February 22, 2010. It requires credit card companies to give notice to customers before changing any original agreements. The new law also protects consumers by allowing them to decide whether to accept any new terms and conditions -- or to deny them by agreeing to pay off the card, according to the original terms, within five years.

The CARD Act also limits interest rate hikes, bans double-cycle billing, limits upfront fees on subprime credit cards, and gives card users a reasonable amount of time to pay their monthly bills.

These rules, however, apply only to consumer credit cards, as in accounts for personal use. Commercial cards -- including corporate (or travel and entertainment) cards, small-business debit and credit cards, fleet cards, purchasing cards, and prepaid commercial cards -- do not fall under the act. As a result, many small-business cardholders have seen their limits dramatically cut, as issuers attempt to reduce their financial risk.

The credit industry, obviously, was not in favor of offering small-business cards the same protections as consumer cards. Because small businesses are more risky and tend to charge more than consumers do, card companies argued that they would have to curtail credit and preemptively raise interest rates if they couldn't raise rates for business owners at a later date.

Because credit card issuers have more difficulty assessing the creditworthiness of small businesses, they say, their ability to extend the large credit lines that many small businesses require depends on their ability to adjust rates down the road, as they determine through experience how well a business will pay off its credit card debt. Not allowing them to do so, they say, would lead to higher introductory interest rates, which would harm those firms that use small-business credit cards.

Whether that’s true is unclear. In April 2010, Bank of America announced that it would voluntarily give small-business cardholders some of the protections extended to consumers under the CARD Act, noting that it did not expect the change to hurt its ability to extend credit. Capital One did the same. But without a law in place to legally extend these benefits, lenders can reverse them at anytime.

So far, the political winds are blowing against small business owners. Last June the Federal Reserve issued a report that stated that giving small businesses the same credit card protections as consumers was not worth the potentially higher cost and reduced credit. In short, the Fed still does not recommend giving business card borrowers the same protections consumers now enjoy under the CARD Act.