In the wake of the financial crisis, Congress passed the Credit Card Accountability Responsibility and Disclosure Act of 2009 to keep credit card issuers from doing things like jacking up customers’ rates with no warning and then slamming them with huge penalty fees if they couldn’t make their new payments. Overall, it’s worked. The Consumer Financial Protection Bureau calculates in a new report that Americans paid $1.5 billion less in late fees and $2.5 billion less in overlimit fees following the passage of the CARD Act.
But the CARD Act doesn’t cover business credit cards. One example: the National Federation of Independent Business puts its name on the NFIB Business Edition MasterCard, which it bills as “built for NFIB members by an NFIB member.” Businessweek is quick to call out the NFIB card, which is issued by First Bankcard, a division of First National Bank of Omaha, for taking advantage of that loophole by adding terms and conditions it wouldn’t be able to get away with in a consumer cardholder agreement.
Businessweek points out that First National can raise cardholders’ interest rates whenever and by however much it wants, and cardholders who don’t make those payments could get hit with a jaw-dropping 30% penalty APR. Another condition “describes a practice that is also considered insidious by critics of predatory lending,” the article says. Basically, cardholders with two different APRs can’t pay down the higher-rate balance until they’ve finished paying off whatever they owe at the lower rate, which virtually guarantees a longer period of indebtedness.
The card also charges a 3% foreign transaction fee, something many consumer credit cards have quietly eliminated over the past year or so, and its balance transfer fee of 4% is more than a percentage point higher than the average consumer card charges, according to data from industry site CardHub.com. “We are only offering a business card, not a consumer card,” the NFIB said in response to questions.
CardHub CEO Odysseas Papadimitriou points out that a growing number of issuers have begun extending some CARD Act protections to their business cards. “Bank of America is the only major issuer that has adopted the protection against arbitrary interest rate increases on existing balances to its business credit cards,” he says.
Here’s the real rub: If the business folds and the cardholder can’t make payments, it’s their credit score that suffers. “The issuer may very well require the business owner to sign a personal guarantee for the debt and become liable in cases of non-payment,” says John Ulzheimer, credit expert at CreditSesame.com. “Any default or negative performance on the card would likely end up on the business owner’s personal credit reports.”
Why would a trade group pitch a product with some pretty serious flaws to its members? Money. Businessweek reports that the NFIB has a financial incentive to promote this card. The group wouldn’t answer questions about the details, but Ulzheimer says it’s possible that the group gets a sort of commission when an NFIB member signs up for a card. “And, they may actually be getting a small percentage of the charges made on the cards,” he says. “That’s not uncommon.”
Despite the lack of protections, credit experts say there can be benefits for an entrepreneur to use a business credit card instead of an ordinary card. Depending on the issuer, the account might not show up on a user’s credit report (unless they don’t pay on time). This means a business owner carrying a high balance relative to their limit won’t take a hit on their personal credit report.
Anisha Sekar, vice president of credit and debit cards at NerdWallet.com, says business cards can be attractive because credit limits can be higher, based on the strength of the business’s financials, some issuers offer tools like expense tracking and rewards programs are tailored to the spending needs of business owners.
Even the NFIB card has some features the experts like. “Rewards are unlimited, which can be a boon for businesses that put everything on their cards in order to maximize rewards,” says Gerri Detweiler, director of consumer education at Credit.com. “If you are willing to pay an annual fee, you can probably get richer rewards, but that’s usually the trade off.”
“If you’re looking for a business credit card, you shouldn’t settle for two points per $1 on office supplies and telecom,” Sekar says, pointing out that some other cards on NerdWallet’s round-up of business cards offer 5% cash back on these purchases. “Its lack of an annual fee and 0% intro rate for nine months are nice, if not unique,” Papadimitriou says, although he points out that the teaser period is shorter than the current average for consumer cards.
Papadimitriou suggests a two-pronged approach for small business financing. “We typically recommend that business owners use a rewards business credit card for everyday expenses they pay in full each month, in order to earn lucrative rewards in key business expense categories, as well as a 0% consumer credit card for financing purposes, in order to garner user protections without sacrificing selection.”