The credit card landscape has changed significantly since the Credit Card Act took effect in February 2010.
Overall, this piece of reformatory legislation increased transparency and consumer rights in the general-use (personal) credit card space, curing many of the ills that pervaded prior to the Great Recession. Perhaps it's most important provision brought debt stability to personal credit cards by prohibiting issuers from increasing interest rates on existing debt unless a cardholder becomes at least 60 days delinquent on payment.
The CARD Act does not pertain to small business credit cards, however, which makes it more important than ever that business owners answer the following questions in devising their companies' payment strategies:
- Which are the best and worst business credit card issuers?
- How do I garner debt stability?
- What's the most optimized payment strategy for my company?
Which are the best and worst business credit card issuers?
The best and worst business credit card issuers fall in line based on their proactive adoption of the most important CARD Act rules, which are as follows:
- No universal default (i.e. you cannot be considered in default on your credit card account because of a missed payment on a separate credit card, loan or bill)
- No double cycle billing (i.e. finance charges cannot be determined by your average balance over the past two billing cycles)
- Issuer must give 45 days' notice prior to changing key account terms
- All payment amounts above the minimum must be applied to the balance with the highest interest rate
- No interest rate increases on existing balances unless the account holder is at least 60 days delinquent (a key provision that ensures debt stability)
A recent Card Hub study ranking the 10 largest credit card companies in the U.S. based on these criteria found that only Bank of America adopted all of the key CARD Act protections on its small business credit card offerings.
After BofA, followed Capital One, Citibank and American Express, in that order. Each applied at least one, but not all, of the major CARD Act protections. Chase, Discover and HSBC did not extend any of the aforementioned protections to their business credit cards, while U.S. Bank and Wells Fargo declined to participate in the study, indicating a lack of organizational transparency.
While you undoubtedly want as many CARD Act protections on the side of your small business as possible, given the positive effect the legislation has had on the personal credit card market, the most important is certainly that which prevents arbitrary interest rate hikes. Without debt stability, it's impossible to budget, allocate funds, develop your business, or feel confident in its financial future.
That's why, if you are going to use a business credit card to fund your small business venture, it must be from BofA or a smaller local bank/credit union that has taken similar pro-customer measures.
Are there any other ways to garner debt stability?
Getting a business credit card from a forward-thinking issuer is merely one of the ways to achieve debt stability for your company. Another option is to simply use a personal credit card.
A personal credit card for business?
Yes, the trite old adage that "this is business, not personal," used often in film and television, has become less relevant to actual business, at least as far as credit cards are concerned. Not only do all major credit card companies hold both you and your company liable for business credit card use, according to a Card Hub study, but most also report business credit card use to your personal credit reports.
As a result, you are free to use a personal credit card for your business spending and thereby garner the full suite of CARD Act protections.
What is the most optimized payment plan for my business?
By now, it's clear that you have three options when it comes to devising a credit card strategy for your small business: 1) Using only a personal credit card; 2) Using only a business credit card from an issuer that has proactively extended all of the key CARD Act protections; 3) Using a combination of the two.
It's ill-advised to use only a personal credit card for small business spending because business credit cards provide tools and services that personal credit cards do not. For example, they allow small business owners to easily track and manage company spending, set personalized spending limits for each employee card, and earn rewards on all company purchases. They also tend to offer more lucrative rewards than personal credit cards.
Now, if you choose to use only a business credit card with issuer-applied legal protections, then you will, of course, be sacrificing variety for simplicity. A single credit card is easier to manage, yes, but the number of business credit cards that boast the required CARD Act protections is relatively small, which means the odds of finding the best possible terms within this crop will also be slim. Trying to find a single card that both offers attractive interest rates and rewards is difficult enough without paring down your options.
Using a single credit card to both revolve debt and make everyday purchases will be prohibitively expensive anyway. When you revolve a balance, you no longer have a grace period for new charges, meaning interest will begin to accrue as soon as you make them.
This brings us to the third option: a two-card strategy.
By using a personal credit card for business funding (i.e. company purchases that you won't be able to pay off in full in a single billing period) and a business credit card for everyday expenses (i.e. purchases that you do pay for in full on a monthly basis), you'll not only garner debt stability, but will also have the opportunity to get both the lowest interest rates and best rewards possible.
You could, for example, open both the 0% credit card with the longest introductory term on the market and the most lucrative rewards business credit card. This strategy is based on the Island Approach to credit card use, which preaches using each credit card for a distinct purpose, playing on the notion that there is generally a trade-off when it comes to a credit card's terms: When one area (e.g. rewards) excels, others (e.g. rates, fees, etc.) tend to suffer.
Final Thoughts Around 80% of small business owners use credit cards for funding purposes, according to the National Small Business Association.
In light of the overhauled credit card landscape, this figure indicates two very important things: 1) a significant portion of the small business community needs to rethink its credit card strategy; 2) those that come to this realization quickest will indeed have an advantage over the competition.
Photo credit: loansafe.org
Odysseas Papadimitriou is CEO of Card Hub