Credit-Card Reform, and Whom it Left Out

By Marc Tracy

Several months ago, when a credit-card consumer-protection bill was being considered, we talked about how the proposed new rules actually wouldn't apply to small-business credit cards. (Here's where we disclose that our sponsor is American Express OPEN.) Well, such a bill has since been passed, signed by the president, and made into law. Consumers are now protected from rate hikes on pre-existing balances; from all manner of onerous fees; and other things that credit-card companies have used in order to draw revenue from their customers with weaker credit. Consumers are protected from these things...unless those consumers happen to hold corporate small-business cards, that is.

This Fortune story explains it well. The law that this new law amends applies solely to personal cards. So if you have a personal card, then, even if you use it to make business purchases, you should be protected; and even if you have a business card that is nonetheless tied to your personal credit, then this law does protect you. But if you use a traditional corporate card--which is not at all uncommon for owners of small, say, limited-liability corporations--then this law does not affect you. Additionally, the Los Angeles Times reports, cards--any cards--with credit limits of over $25,000 are exempt from the protections. While that no doubt simply exempts plenty of more well-off people who are likely in little need of these protections anyway, it's also likely to exempt the less-wealthy who nonetheless require bigger limits because they use their cards for both personal and business purposes.

Okay. So on the one hand, it's not entirely clear how many (or how few) small businesses remain unprotected: it's extremely difficult to collect precise data on this stuff. The National Federation of Independent Business has reportedly found that three-fourths of small businesses have corporate cards (though it doesn't know how many of these are tied to personal credit, and therefore still protected), and that 39% of small-business owners use a personal card (again, still protected) to make business purchases. On the other hand, there are clearly some out there left out in the cold.

Ultimately, we think that passing this law only to leave many small business owners out is a big error, and a disservice to the country's entrepreneurs. Over at Business Week's The New Entrepreneur blog, John Tozzi--who, generally, has owned this issue for a while now--has two good posts illustrating why small business owners need credit-card reform that actually applies to them. Here, he sums up a recent report that found that "two-thirds of small business owners reported seeing their rates go up in the last 12 months, and 41% said they had their credit limits reduced"--this, of course, at a time when rates generally have been low. And here he talks about the shuttering of Advanta, which is in the very business of small-business credit cards.

One valuable point Tozzi makes is that small-business cards, particularly right now, are if anything more likely to carry balances than personal cards as small business owners, in this credit environment, have been forced to resort to taking on debt through their credit cards. Indeed, 60% of these folks report carrying a balance.

And now that credit-card companies' previously most valuable customers--personal consumers--are no longer subject to the high and retroactively applied rates and fees that used to be these companies' meal ticket, where might these companies turn to maintain profits? Some have worried that they will figure out ways to make more money off those personal users who don't carry balances, and no doubt that's true. But might they not also turn to small-business owners--who not only still carry balances but also remain open to high rates? Especially since, as the Los Angeles Times notes, the number of small-business cards has risen dramatically over the past decade, thanks to aggressive marketing campaigns?

The Times reports that an amendment put forward by Sen. Mary Landrieu (D-La.)--chair of the Small Business & Entrepreneurship Committee--would have extended the protections to corporate cards tied to businesses with under 50 employees. The amendment also would have exempted cards with $50,000, not $25,000, limits. It was voted down before the final bill passed. Ooops.

"We will look into other legislative vehicles" for meaningful reform that applies to small-business cards, a Landrieu spokesperson said. We hope that "we" encompasses just about everyone.

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May 28, 2009 11:45 AM