Credit Card Reform May Have Been Good to You, but is Hurting Small Business
President Barack Obama is of the opinion that The Credit Card Accountability and Responsibility Act will provide reliable and much needed protection to consumers and that continuous efforts will be made to reform the system with due emphasis on accountability, transparency and mutual responsibility. However, while the Credit CARD Act protects individual and high-risk cardholders from abuse, small business cardholders are feeling the financing crunch more than ever.
The act signed into law on May 22, 2009, is a comprehensive credit card reform that aims “to establish fair and transparent practices relating to the extension of credit under an open-end consumer credit plan.” This legislation outlaws some of the most controversial billing practices and provides the following protections:
- Forbids interest rate hikes on existing balances until the borrower is 60 days behind.
- Requires credit card issuers to give a 45-day notice to raise the interest rate.
- Requires college students under the age of 21 to have a co-signer. Otherwise, the card issuer cannot issue credit limits any higher than 20% of students’ income.
This regulation also mandates that credit card companies apply payments towards the debt that carries the highest interest rate.
Along with bank loans, business credit cards are among the few financing options available to small business owners (those with less than 50 employees). Additionally, as other traditional sources of financing began to dry up during the recession, more business owners began relying on credit cards to run their operations.
As a result of the Credit CARD Act, credit card companies can no longer take advantage of individual consumers, but are now taking advantage of small business cardholders in order to remain profitable. Practices such as imposing excessive fees, arbitrary interest rate hikes, and closing accounts without much notice are still legal so long as the cardholder is not an individual consumer. As a result, typically model cardholders are becoming high-risk due to their inability to pay off their balances each month.
“Small businesses have consistently contributed 50% of GDP since 1998 and have created 60-80% of new jobs.”
Small businesses have consistently contributed 50% of GDP since 1998 and have created 60-80% of new jobs. Notably during recessions, many people loose jobs and either start up their own business or go to work for a small business in their area. Small businesses are also the traditional outlets of innovation, due to fewer layers and a lack of bureaucracy which allows them to respond very quickly to market forces and take advantage of new technologies.
More than half of small business owners rely on their business credit cards more than any other source to finance their firms day-to-day operations. Many owners use them to pay for expenses, inventory, and supplies while they wait for payments from their customers. Since more small businesses are now reporting using their credit cards to leverage their business loans, plus a decreased ability to finance their operations, the Credit CARD Act must be amended to include them in the protections.
Small business success depends on the ability to secure adequate financing. Without it, they cannot hire new employees, maintain inventory, or contribute to the growth of the US economy. The recent landmark in credit card regulations has undermined small business value and has raised questions about the sustainability of small businesses, yet consumers still have the power to help by shopping locally, working at a small business, and investing in small business ventures.