To prevent credit card company from taking advantage of customers, Congress enacted the Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009. This act required credit card companies to let customers close accounts if their annual percentage rates (APR) increase, allow customers to pay off the current credit card balance at the lower interest rate and send statements to customers at least 21 days before the payment is due.
The act also prevented credit card issuers from increasing the interest rate in the first year and they must send a notice 45 days before the next payment is due. (The issuer can start charging the higher interest rate on the 14th day -- not 45th as many people believe -- after notification. Source: credit.com.) Any penalties and fees had to be reasonable and proportional. "Proportional" means credit card companies cannot charge a fee that's higher than the balance on the credit card.
However, the Truth in Lending Act excluded business and commercial credit cards from the CARD Act regardless if the holder is a sole proprietor, small business owner or corporate employee. As a result, these "business" credit cards don't have the same protections that users of consumer credit cards expect. The May 2011 Pew Charitable Trusts study has discovered:
- "80% of business credit cards included an 'any time' change in terms clause with no right to opt out."
- "67% of business cards had penalty rates for late payments or overlimit transactions. The median penalty annual percentage rate (APR) was 29.4%."
- Because penalty fees are, for the most part, unrestricted:
- 73% of business cards included a late fee (median amount: $39).
- 67% of business cards included an overlimit fee (media amount: $39).
- "Median Purchase APR: 13.24 (lowest advertised) and 18.12 (highest advertised)."
- 41% of cards had an annual fee with a median of $67.
So what should a business owner do? Some small businesses owners duck this by using their personal credit card for business and personal purchases. Unfortunately, this affects your credit score and business deductions. Your business debt will show up on your personal account. It also leads to accounting confusion and a potential IRS audit.
This is one time where business owners need to read the fine print. Rather than using the credit card for working capital and large purchases, keep the purchases manageable so you can erase the balance by paying off the credit card every month to avoid fees.
Despite the problems with business credit cards, it's wise to separate business and personal credit card purchases. Also, watch for news regarding Congresswoman Nita Lowey who has introduced the Small Business Credit Card Act of 2011 (H.R. 1137). This will extend CARD Act protections to businesses with fewer than 50 employees.
How do you think businesses should handle credit cards? What alternatives do businesses have to avoid the problems with a business or commercial credit card?
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