What's in your wallet? If it's a credit card designated for business use, listen up.
Anyone can receive an offer for a small business credit card—whether they own a small business or not. But consumers might want to think twice before they take the lender up on the offer.
Credit cards that are labeled for business or commercial use are exempt from a recent law enacted to protect consumers against unpredictable interest rates and unrestricted penalty fees. This means average consumers are potentially exposing themselves to the practices that were banned by the Credit Card Act of 2009.
"Every month more than 10 million business credit card offers are mailed to households at all income levels," said Nick Bourke, director of Pew's Safe Credit Cards Project.
Although some of the nation's largest banks have voluntarily made their small business credit cards more transparent, the vast majority of card issuers continue practices that are banned by the new regulations, according the study, which was conducted by Pew Health Group's Safe Credit Cards Project.
It's unclear how many business cards are held by individuals, but there are about 11 million "small business" credit card accounts, with an average of 1.4 cards per account.
Some of the key points of the study were:
- 80 percent of business cards Pew studied included an "any time" change-in-terms clause with no right to opt out, which means bank issuers can change account terms at any time with little or no notice.
Terms cannot change for the first year for consumer cards, and 45 days' notice is required when terms are changed, and consumers generally may opt out.
- 84 percent of business cards gave issuers the sole power to apply payments to low-rate balances first, which maximizes charges on higher-rate balances.
- 67 percent of business cards included penalty rates for late payments or overlimit transactions. This means a penalty interest rate can be applied immediately and without notice for any violation, and that rate can last indefinitely on any balance. Consumer cards can only experience this if the account is seriously delinquent. The median penalty annual percentage rate was 29.4 percent.
- 73 percent included a late fee, and 67 percent of the cards had an overlimit fee. Both fees averaged around $39 each. Unlike consumer cards, penalty fees are virtually unrestricted for business cards.
Some banks have opted out of these practices. Bank of America has eliminated penalty interest rates, overlimit fees and late fees and Bank of America and Capital One have adopted the rule that payments be applied to the larger balance first.
Still, Bourke is urging that the Credit Card Act be extended to any card where the cardholder is personally liable, or that consumers be warned when a credit card is not covered by the Credit Card Act.
Pew's research looked at credit cards issued by the 12 largest credit card issuers, which control about 85 percent of the small business credit card market.