Credit Card Reform Provides No Relief for Small Business Cardholders

Credit-card reform doesn't apply to small business cards, which more companies are relying on as loans have dried up

Joseph Rosmann thought he was a model small business credit card customer. A 65-year-old general contractor in Bellevue, Wash., Rosmann typically charges between $2,000 and $4,000 in expenses each month on his Chase card. He carries a balance of between $7,000 and $8,000 as he waits for clients to pay, and he makes well over the minimum payment each month. His six-year-old high-end renovation business continues to grow despite the soft housing market, and he expects to bring home $70,000 in net income this year on revenues above $150,000.
So Rosmann was surprised—and angry—when he got a notice in the mail from Chase (JPM) May 27 saying his interest rate would increase from 12.24% to 15.24% on his existing balance and all future purchases, starting with his next billing cycle. The notice said that the change is "in response to market conditions and to maintain profitability on your account." Rosmann must close his account, the only credit card his business has, by June 22 if he wants to opt out of the rate increase.

The sweeping credit-card reform law President Obama signed May 22 is intended to protect most cardholders from practices like changing terms on short notice and retroactive rate hikes. But when the law takes effect in February, business cardholders like Rosmann won't get the same relief. That's because the Credit Card Accountability Responsibility & Disclosure Act doesn't apply to small business cards, which companies increasingly rely on in lieu of traditional financing. About 11% of all Visa (V) and MasterCard (MA) purchases are now made with small business credit cards, up from 3% a decade ago, according to David Robertson, publisher of the credit-card industry newsletter The Nilson Report—and that doesn't count volume by American Express (AXP), one of the largest players in the small business segment.

"A Good Step Forward"
Attempts in both houses of Congress to explicitly include businesses with fewer than 50 employees failed, but the law did order the Federal Reserve to examine the use of credit cards by small businesses and recommend protections to Congress within the next year. Todd McCracken, president of the National Small Business Assn., which has long advocated stricter rules for credit card lenders, calls the law "a good step forward" but hopes regulators will extend the rules to commercial cards.

Still, many small business owners use personal cards for business purposes. They'll see an end to retroactive rate hikes and double-cycle billing (calculating interest and fees based on the balance going back two months, even if earlier charges have already been paid off). Credit-card companies will have to send bills at least 21 days before they're due, give 45 days' notice before rate increases (rather than the current 15), and 30 days' notice before closing an account. In addition, card companies won't be able to raise rates in the first year after a cardholder opens the account.

While the new protections will help borrowers in the long run, some business owners fear that credit-card companies' response to the new law will make things even worse.
"Almost all small business and consumer card accounts will be adjusted near-term to permit issuers to charge higher fees," The Nilson Report's Robertson says in an e-mail.

No Rhyme or Reason
Chase spokesman Paul Hartwick wouldn't comment directly on whether Chase's rate hike is in response to the new credit-card law. "We constantly evaluate the risks and costs of funding credit-card loans. We are also evaluating changes required due to pending regulations," Hartwick says in an e-mailed statement. "When necessary, we make changes to pricing, terms or credit lines based on borrower risk, market conditions, and the costs to us of making loans… We recognize some customers may be affected by these changes for the first time and, as always, we are working hard to provide consumers impacted by these changes with alternatives."

Rosmann, who was a senior partner at accounting firm Coopers & Lybrand (now PricewaterhouseCoopers) before starting his home construction firm, is steamed. "This is an effort to quickly bump up profitability in a line of business where they may be having some challenges. [They're] not taking a hard look at the risk associated with the clients," he says. "Everybody just becomes a number." Some issuers, facing bigger losses on small business credit cards than they expected, are clamping down on borrowers indiscriminately. Advanta (ADVNA), a Spring House (Pa.) credit-card company that deals exclusively with small business cards, announced on May 11 that it would close all of its more than 1 million small business accounts after reporting a $76 million loss in the first quarter. Many account holders didn't hear until days before their cards were to be shut down on May 30.

Karen Lehr, a human-resources consultant in Gainesville, Va., got an e-mail May 26 notifying her that her Advanta card would be closed four days later. At first she thought the message was a hoax. A satisfied Advanta customer for six years, Lehr said she used the card for convenience and always paid the balance each month. Now, she's scrambling to switch services like her cell phone that are billed automatically over to her personal card. "I was appalled by having only four days' notice that my company's credit line is being pulled, through no fault of my own," Lehr says.

Small Biz is Vulnerable
In theory, the credit-card reform law would protect borrowers like Lehr and Rosmann by giving them more notice before account changes and barring retroactive rate hikes. But unless lawmakers expand the rules to cover small business cards, small business cardholders remain vulnerable to practices that card companies won't be able to use on consumers. Rosmann says the banks will just drive away good customers: "They are alienating people like myself, and it just makes no bloody sense," he says.