Ladies and gentlemen, prepare your red pens. It's time to revise the Credit Card Accountability Responsibility and Disclosure Act of 2009.
Sooner or later, we're going to get to that point, and it's not because this personal finance reform law is ineffective. It's actually the opposite. The CARD Act, which went into effect in February of 2010, has done a remarkable job of increasing transparency in the credit card industry and eradicating many of the anti-consumer practices that helped lead us into the Great Recession. The problem is the law discriminates against small-business owners – 80% of whom rely on credit cards. That simply has to change.
Just look at what the law does and tell me why we wouldn't want to confer the same benefits on small-business owners.
It eliminated double-cycle billing (basing interest charges on one's average balance over the past two billing cycles, rather than only the most recent universal default), applying penalty annual percentage rates to a person's credit card just because they missed a payment on a completely separate loan or line of credit, hair-trigger re-pricing (increasing interest rates on existing debt for little or no reason) and unfair payment allocation (making sure that someone's most expensive debt is the last to be paid off). The law also includes provisions requiring credit card issuers to give customers plenty of advance notice before changing key account terms, banning overly burdensome fees for people trying to rebuild their credit and making fee amounts match the "crime," so to speak.
Nevertheless, lawmakers and the Federal Reserve seem to think that it's fine to subject our nation's small business community to these unscrupulous tactics, even though you could make the case that the CARD Act should already apply to small-business credit cards as currently written.
You see, the CARD Act applies to "open-ended consumer agreements." Given the fact that banks pull consumer credit reports when making business credit card approval decisions and small-business owners are personally liable for debt, a small-business credit card agreement is as much a consumer agreement as it is an agreement with a business entity.
So why hasn't Congress or the Fed taken action yet? I mean, other than that it takes forever to get anything done in Washington these days.
The CARD Act actually includes language that directed the Fed to conduct an independent study on the efficacy of extending the law to small business owners. One of the primary reasons this study cites for not extending the CARD Act to small-business credit cards is that doing so would adversely impact the cost and availability of these products.
However, business-branded credit cards can't compete effectively with consumer cards as things stand right now. They actually make terrible funding vehicles given that one's balance could suddenly become much more costly as a result of something out of their control. That makes it difficult to allocate funds and, perhaps most importantly in today's climate, hire new employees with any confidence. That's also why we at Card Hub advise small-business owners to use consumer credit cards for purchases they will not be able to pay off by the end of the month. It's also why the rest of the industry would be well served to follow Bank of America's lead and proactively apply all CARD Act protections to their business portfolios, rather than wait for the regulatory hammer to drop.