Credit Card Reform Bill Leaves Out Small Business Owners

May 29, 2009

According to a report by the Los Angeles Times, small-business cardholders could be prime targets by the credit card companies for raising interest rates, scaling back rewards and imposing annual fees. As congress is reining in the penalties that banks can levy on their riskiest borrowers, card issuers are looking for any source of revenue to increase the revenue lost by the reform bill.

The LA Times reported that the new law, which shields consumers from predatory fees and sudden rate hikes, doesn't include customers holding credit cards backed by their companies. An amendment that would have extended the protections to cardholders whose businesses have fewer than 50 employees was killed before the final bill was voted on.

Many small firms rely on credit cards to pay for everything from paper clips to equipment. Even more are doing so as the recession has limited access to other credit. Some are already feeling the sting of higher rates.

Anna Perelman, a small-business co-owner told the Times that her firm was being hit with interest rate hikes and credit-limit cuts, seemingly out of the blue.

Small businesses have been courted heavily by card issuers in recent years, and the number of small-business cards has grown dramatically, said David Robertson, publisher of the Nilson Report, an industry newsletter based in Carpinteria, Calif. Small-business credit cards now account for 11% of all Visa and MasterCard charges, up from 3% in 1998, he said.

The actual share of business-related purchases is far higher, because many small-business owners still use their personal cards for business expenses. It is unclear whether those cardholders are included in the new protections. The law amends the Truth in Lending Act, which focuses on "consumer use," defined as that which is primarily for personal, family or household expenses.

The new law does require the Federal Reserve to conduct a review of credit card use by small-business owners with fewer than 50 employees. The report, which is supposed to include recommendations for initiatives covering small-business cardholders, is due to Congress within 12 months.

In the near term, credit looks to remain tight, and credit card companies are likely to continue to hike rates and cut limits where they can in a bid to reduce their own exposure to risk and save money, said the Times.