Business Credit Cards Carry Hidden Risks

What’s not to like about a business credit card? You can take clients out to dinner, buy office supplies and pay for your business trips without running up your personal card. Not only do business credit cards have higher lines of credit, their statements are ideal for tracking business purchases for taxes. But if you’re a small business owner, these cards carry some risks -- ones not always apparent in the glossy ads for them.

Business credit cards, as it turns out, don’t offer the same protections as personal credit cards. Because of intense lobbying from banking interests, business cards were excluded from protection under the Credit CARD Act of 2009, which was designed to put a stop to the most abusive practices of credit card issuers. This leaves small business cardholders exposed to everything from unpredictable rate increases to constantly shifting due dates.

Here are the major business credit card problems to watch out for:

• Higher interest rates. Interest rates on some business credit cards can be painfully high. Many charge interest rates of about 16%, but depending on your credit score, interest rates can climb to 29% or higher. And since the Federal Reserve raised a key benchmark interest rate in 2016, the cost of credit surged in 2017.

• Overnight changes in terms. In a 2011 report, Pew Charitable Trusts noted 80 percent of business credit card issuers could change the terms of the card agreement at any time – something prohibited in regular consumer cards. To protect the millions of small business owners and consumers from deceptive practices, the non-profit has urged the government to expand safeguards in the Card Act to all cards for which cardholders are personally liable.

• Changing due dates. Unlike a consumer credit card, a business card issuer can set a different due date every month, making it much easier to miss a payment.

• More penalties. If you do miss a due date, the business card issuer can immediately raise the rate on your entire balance. Unlike the interest rate on a personal credit card, which can’t increase the rate on current balances until you’re 60 days delinquent, the credit card company can raise the rate on your business credit card and slap you with a penalty APR (fees + interest) if you’re even one day late.

• Unpredictable rate increases. Unlike consumer credit cards, which require a 45-day notice, the rate on a business credit card can be changed without notice. Most of them are variable, so the interest rate depends on how the prime rate changes.

• Liability for employee purchases. It’s important to track employee purchases and have written policies on what the cards can be used for, because you’re the one who’s liable for the purchases.

Even if you read your credit card agreement to check for these problems, it may be hard to decipher: Joe Ridout of Consumer Action has called them “mind-numbingly obtuse.” And that works to the advantage of the issuers.

Does this mean you should forgo a business credit card? Not necessarily. They can be invaluable in managing cash flow, and the rewards and sign-up bonuses are often much more expansive than those offered by regular cards.

“Business credit cards are surprisingly more affordable than many other business financing options,” said Priyanka Prakash, a loan specialist at FitBiz Loans and Fit Small Business, in a recent interview with MoneyGeek.com. “Many cards also offer zero-percent promotional periods. If you can buy and pay back during that period, it’s like borrowing interest free.”

But like a regular credit card, business credit cards should be paid off at the end of every cycle. If you’re planning to use a credit card to fund your business and pay it off down the road, it’s much safer to use personal credit cards for funding purposes and a business credit card for purchases you can pay off within the month.

“Remember, even though these are business credit cards, you typically have to provide a personal guarantee of repayment,” said Prakash. “That means that if you cannot pay back the balance, the issuer can repossess your personal assets, such as your home and car.”

In addition, the best business credit cards have voluntarily adopted some of the Credit CARD Act protections, so look for one of those cards. Bank of America, for example, doesn’t hike the rates on existing balances. It also gives you at least 25 days between the bill mailing date and the date that it’s due, so you won’t get a bill and realize it should have been paid yesterday.

Another good model is American Express, which offers a 21-day period between the statement date and payment due date and the same payment due date each month.

Keep in mind, though, that business card protections from these issuers are voluntary and can be rescinded at any time – another good reason to check your statement every month.

Source: https://www.forbes.com

Image Credit: Shutterstock

Theresa Todman, Managing Partner/CEO of B&M Financial Management Services, LLC . Theresa works with small business owners and entrepreneurs to assist them with financial management and creating organized systems and procedures. She specializes in bookkeeping, accounting, QuickBooks solutions, small business tax issues and consulting.

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