January 19, 2012

State of Alabama
Press Release: Alabama Department of Commerce

The Return of Small-Business Credit Cards

January 16, 2012

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Lenders are courting small-business owners like you with growing numbers of new credit cards and generous rewards programs.

And it's easy to see why. About 42% of small-business owners carry a credit-card balance, according to July 2011 data from the National Small Business Association in Washington, D.C.

But the cards often lack consumer protections and thus, they can hurt or destroy your credit score.

Indeed, critics say lenders are turning to small-business cards because they have fewer consumer protections. Small-business credit cards were excluded from the Credit Card Accountability Responsibility and Disclosure Act of 2009 that outlawed random interest-rate hikes and other practices on personal credit cards.

On consumer cards, issuers can't raise that interest rate on existing balances unless the cardholder is at least 60 days late with a payment. But on small-business cards, issuers can change it whenever they'd like, according to Odysseas Papadimitriou, chief executive at CardHub.com, a credit-card comparison website.

If you are paying two different interest rates—one on purchases and another on a balance—the monthly payment that is above the minimum required could be applied to the balance with the lower interest rate first, according to Bill Hardekopf, chief executive at LowCards.com, which tracks credit card offers, including those aimed specifically at small-business owners.

In contrast, personal credit cards must apply the payment to the higher rate first to lessen the costs for the borrower.

Bank of America chose to apply all the major provisions of this law to its small-business credit cards and Capital One has to a lesser extent. But most major lenders haven't, according to an April 2011 study from CardHub.com.

You also have to consider how small-business credit cards will impact your credit score. Even though they're pegged to small-business spending rather than personal spending, in almost all cases, you, the business owner who signs up for a business card, are personally liable. (The lenders say the small business is also held responsible, though in most cases that boils down to the owner.)

Typically, if a small-business cardholder stops paying, lenders will inform the credit bureaus. That could lead to a lower credit score for you, which would likely make getting a mortgage or other loan for personal purposes harder.

Despite the risks, some experts say small-business credit cards are among the safer financing options for small-business owners right now.

Signing up for small-business loans is still risky: Most loans require collateral that the lender can collect on if the loan is not repaid, such as the borrower's home equity or his business's machinery, says Jeanne Hulit, acting associate administrator for capital access at the Small Business Administration.

In contrast, credit cards are unsecured debt, which means small-business owners don't have to put their home or other belongings at risk, she says.

One strategy may be to use a mixture of plastic. You can use the small-business credit cards for purchases that will be paid in full each month. That way, you can potentially avoid the risks while earning more rewards.

The average interest rate on personal credit cards is 12.4%, according to the Federal Reserve. But the average rate small-business cardholders pay is 15%, according to the NSBA.

Doris McMillon, owner of McMillon Communications, a Fort Washington, Md., executive-coaching-services provider, says she was paying her small-business credit card on time and sending more than minimum required payment when her interest rate skyrocketed to 23% from 9% two years ago.

Since then, Ms. McMillon says she's been using her personal credit cards for the business-related purchases she can't pay off in full right away. And she's been using small- business credit cards for purchases she can pay off in full each month while taking advantage of the rewards.

Rewards on small-business credit cards are relatively generous.

In October, Capital One introduced six new small-business credit cards. American Express and Bank of America launched a total of five credit cards, over a period of six months last year. Each has its own rewards programs.

Chase recently increased the rewards it doles out on three of its existing small-business cards.

Some credit cards also provide free access to budgeting tools. In November, Chase launched an online invoicing and cash management tool for its small-business cardholders, which it says can help them track billing statements and payments made by their clients.

Card issuers say they're eager to provide small-business owners with purchasing power. And as the economy improves, they expect more small businesses will be created, and they'd like to sign up those new entrepreneurs as customers.

Longer term, these small-business credit cards can help small businesses to establish a credit history with one of the small-business credit bureaus, says John Ulzheimer, president of consumer education at SmartCredit.com, a credit-monitoring site.

That might make getting approved for financing easier and cheaper.

Ms. Andriotis is a reporter for SmartMoney.com. Write annamaria.andriotis@dowjones.com.

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