Small Business Credit Card Rates Hiked and Limits Slashed; Prospects for Reform?

Many small businesses have recently had their credit card interest rates hiked and/or their credit limits slashed. At the same time, more business owners have come to rely on plastic to operate or finance the business. With consumer credit card protection approaching, some wonder whether we'll see any small business oriented reform of credit card industry practices.

The National Small Business Association (NSBA) released its 2009 Small Business Credit Card Survey. The results showed increased reliance by small businesses on credit cards, along with worse terms imposed by credit card issuers. Nearly two thirds of responding small businesses claimed to have had their interest rates hiked in the past 12 months. 75% reported that their credit card terms had worsened in the past six months.

Despite higher interest and lower limits, the survey shows increased reliance on credit cards -- not simply as a stop-gap, but to finance the business. Credit cards were the most commonly reported source of financing for capital needs, with 59% of businesses saying they used plastic to make capital purchases. 34% of small businesses responded that credit card debt constitutes 25% or more of their business debt.

With headlines about consumer credit card protection dominating recently, many small business owners want similar protections.

The House recently passed what was dubbed a Credit Cardholder's Bill of Rights, and the Senate is looking at a corresponding bill this week. Protections considered include restricting credit card companies' ability to change rates "arbitrarily" (meaning when the cardholder has missed no payments), curbing the ability to change interest rates on retroactive balances, preventing double cycle billing and other questionable penalty practices.

As noted by Business Week, legislation currently on the table would amend the Truth in Lending Act, which generally does not apply to commercial lending. For this reason, the NSBA has called for passage of the Landrieu-Snowe Amendment to the Senate bill currently being considered. It would bring credit cards used by small businesses within the new protections, and would apply the protections to cards up to $50,000 in credit limit rather than $25,000 (the current ceiling for Truth in Lending protection).

Including several of those being contemplated currently for consumers, the NSBA calls for the following reforms to credit card practices harming small businesses:

1. Prohibiting the practice of universal default;
2. Prohibiting the practice of double-cycle billing;
3. Prohibiting the retroactive application of interest rate hikes;
4. Limiting the interest rate percentage increases that can be imposed;
5. Requiring card issuers to apply a customer's payments to the card balance with the highest interest rate first;
6. Prohibiting extra interest charges on card debt that the cardholder already paid in full;
7. Prohibiting interest charges on transaction fees;
8. Prohibiting late fees if an issuer's action caused a delay in crediting a payment; and
9. Establishing an industry-wide practice regarding the time on which a payment must be received or sent to be considered on time.

• 2009 Small Business Credit Card Survey [pdf] (NSBA)
• NSBA Priority Issues: Credit Card Reform (NSBA)
• Senators Cut Deal On Credit Card Bill (Washington Post)
• Debt vs. debt: Which loans do I pay off first? (MSNBC)
• Financing Basics (FindLaw)