The Credit Card Accountability, Responsibility and Disclosure Act last year put an end to many consumer credit card practices lawmakers considered unfair, but it had little effect on business-oriented credit cards, most of which continue to skirt the new rules, a new study suggests.
The vast majority of direct-mail solicitations business owners and consumers receive each year for business, commercial and professional credit cards still contain some of the most "potentially harmful" clauses the CARD Act eliminated, exposing customers to higher costs and greater risk, the Pew Health Group found in a study of business card solicitations.
The Washington, D.C.-based nonprofit, which has closely examined credit card practices in a series of studies, is urging lawmakers to extend the CARD Act’s provisions to business cards “to better protect individuals, families and small-business owners,” Nick Bourke, director of Pew’s Safe Credit Card Project, said in a May 18 press release.
A recent Pew study found that the CARD Act stabilized most consumer credit cards issuers’ interest rates and fees (
In its latest study, Pew during the week of Jan. 3, 2011 examined consumer credit card disclosures from the top 12 U.S. card issuers and found that 80% of business credit cards included clauses enabling issuers to change the card’s terms at any time and for any reason, with no right to opt out of the new terms.
Business credit cards represent only a fraction of all credit cards, but issuers have continued to aggressively market them to households in recent years, Pew says.
Some 11 million “small business” credit card accounts exist in the U.S., with an average of 1.4 cards per account, Pew estimates show. Business cards accounted for 9.1% of all credit card offers mailed between January 2006 and December 2010, resulting in an average of 44 million business card mailed each month to some 12 million households.
Most of those offers do not contain important cardholder protections contained in the CARD Act, passed in 2009, with most provisions going into effect in February 2010, Pew says.
For example, the CARD Act requires issuers to notify cardholders of any changes in account terms 45 days in advance with the right to opt out, and also prohibits issuers from applying interest-rate increases to existing balances. That protection is absent from most business card offers.
Some 84% of business credit card offers also are structured so issuers may apply payments first to low-interest balances, Pew found. This practice, which makes it difficult for cardholders to dig out of debt when carrying large balances, ended last year for consumer credit cards when the CARD Act went into effect, requiring issuers to apply payments first to cardholders’ highest-interest balances.
More than half, 67%, of business card offers enable issuers to raise cardholders’ interest rates if a payment is received late or if charges exceed the credit limit.
Under the CARD Act, issuers cannot apply penalty interest rates to existing consumer card balances except if an account is more than 60 days past due. Also, issuers now must review consumer card interest-rate increases periodically and restore the cardholders’ previous interest rate after receiving six consecutive on-time payments.
The median penalty on business credit cards for late payments and exceeding the credit limit is $39, Pew found, while under the CARD Act fees for consumer credit cards must be “reasonable and proportional.” The CARD Act generally restricts consumer credit card penalties to $25 for the first violation and $35 for subsequent violations. Over-limit fees are prohibited on consumer credit cards unless the cardholder has opted in to receive that service.
Several major card issuers voluntarily have adopted the CARD Act’s provisions for business credit cards, Pew notes. Bank of America Corp. last year eliminated penalty interest-rate hikes, over-limit and late fees on its business cards. And both BofA and Capital One Financial Corp. both last year began to apply payments to higher-interest balances first.
Those moves are commendable, but issuers still have the opportunity to take advantage of business credit cardholders with unfair practices the CARD Act prohibits, Pew contends.
Pew is urging lawmakers to extend the CARD Act to all credit card products, including those targeting business owners and professionals, or at least “require issuers to alert applicants whenever a credit card is not covered by the Credit CARD Act, specifically highlighting the risk of significant interest rate increases on existing balances and higher costs from penalties, payment processing, and late fees.”
Responding to Pew’s study, the American Bankers Association in a statement said business credit cards provide a vital link to capital, and issuer typically design their more-flexible terms to cater to small business’ specific needs.
Moreover, the Federal Reserve Board in a May 2010 report to Congress required by the CARD Act on the use of business cards did not recommend extending the industry’s new consumer card-account rules to business cards, the association noted.
“The Fed found that the relative benefits of applying the pricing provisions of the CARD Act would be limited because of the ‘potential risk of increased cost and reduced credit card availability for small business,’” the association said.
The Fed also found that standardizing and improving disclosures for small-business credit cards would produce some benefits, but it was unclear whether applying the CARD Act’s rules to them would outweigh the costs, the association said.
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