February 22 marked the effective date of the Credit CARD Act of 2009 – bringing relief to consumers who will no longer be subjected to practices such as increasing interest rates on existing balances and reducing credit lines to less than the balance owed.
The Act, while not covering all credit card abuses, is good news for consumers struggling to keep up with mounting debt during the economic crisis.
But there’s one thing we didn’t hear about while learning the many benefits of the new law: it doesn’t apply to business credit cards.
This can come as a surprise to many of us who never stopped to consider the difference between a personal credit card and a business credit card. Aside from keeping expenses separated for accounting purposes and the fact that the rewards might be different, we probably viewed a business card the same as any other. But, as it turns out, they are two separate things, covered by different rules.
Credit card issuers may choose to extend the CARD Act rules to their business credit cards, but they are not obligated to do so. Thus, the interest rate on the balance you carry on your business credit card can still be increased for any reason.
To avoid this threat some small businesses are transferring business debt to their consumer credit cards, but experts say that is not a good idea. For one thing, using a consumer card for business could turn it into a business card under the law.
Next, using a consumer card for business expenses can lose the tax deductions allowed for interest on business expense. Any time you mix business and personal expenses on the same card, it becomes difficult to calculate interest paid on each, so the IRS will disallow all interest deductions for that card.
This use can also lower your FICO credit scores because business debt will be reported as personal debt. Until recently, no business debt was reported to the credit bureaus. Capital One has recently changed their methods and does now report small business credit use to both business and consumer credit bureaus.
Finally, financial advisors are warning that small businesses should act quickly to create a back-up plan for business expenses. If possible, obtain a fixed rate small business loan to cover any outstanding business credit card debt.
Since the CARD Act prevents credit card issuers from imposing penalty rate increases on consumers, they will be losing a revenue source of approximately $10 billion per year. Experts expect that they will attempt to regain some of that loss through rate and penalty increases on small business credit cards.
Author: Mike Clover
CreditScoreQuick.com your resource for credit report, credit cards, loans and Credit News.
