Small-business owners have been slapped with credit card interest rate increases of more than 30 percent since January 2010 because their cards aren't getting the same protections as those of consumers, says a new study.
The Credit Card Accountability, Responsibility and Disclosure Act, enacted last year, limits rate increases, requires banks to apply payments to higher-rate balances first, and mail bills 21 days before the due date instead of 14 days, among other provisions designed to protect consumers from unfair billing practices and rate hikes.
But cards offered to businesses aren't included in the legislation. According to a study by BillShrink, a search engine that compares product options, before the rules took effect in February a third of issuers raised consumer card rates an average of 16 percent. But rates on small-business cards can rise unchecked – and so far have increased more than 30 percent this year, says the study, which analyzed data from 2,300 small businesses seeking advice from the site.
"We predicted earlier this year that small businesses would be subject to rate increases as the banks try to make up for lost consumer revenue resulting from the CARD Act," said Schwark Satyavolu, CEO of BillShrink, in a statement. "Since small businesses aren’t protected, they appear to be an easier target for card rate hikes."
(How keen are credit card companies to cash in on this loophole? So keen that they are reportedly offering corporate cards to people who don't own businesses, prompting Senator Charles Schumer, the New York Democrat, to write to the Fed asking it to curb the pitching of the legislation-exempt cards to consumers.)
Small firms also have a lot more offers to be wary of: Issuers increased mailings of corporate-card offers by 256 percent in the first quarter of 2010 compared to the year before, according to Synovate, a London-based market research firm. And according to the Federal Reserve, 83 percent of small businesses in 2009 used business and personal credit cards, which essentially amount to short-term loans.
Despite the different treatment from credit card companies, small businesses tend to pay off their monthly balances more often than consumers, according to the BillShrink study. Just over a quarter of small firms don't pay off their balance every month compared to 40 percent of individuals. The average debt held by a U.S. small business is $12,100, compared to $7,020 for consumers.
Other survey findings: Perhaps not surprisingly, small firms that pay off their balances tend to have better credit ratings and larger annual revenues than those that don't. A full 60 percentof companies carrying a balance have revenues under $149,000. (For the record, these business owners rated cashback benefits as the most important card reward feature, followed by airfare rewards.)
Switching to a card with better rates and improved rewards could save the average small business owner more than $1,500 a year, the study said.