If you and other small-business owners were hoping that the U.S. Federal government might give business credit cards the same kind of protections as consumers get, well you can “forget it” according to a recent report issued by the Federal Reserve Board (PDF).
The Credit Card Accountability, Responsibility and Disclosure (CARD) Act, which took effect earlier this year, aims to give consumers who use credit cards some relief from excessive fees and fines.
Like consumers, business owners have been hit by rising interest rates and fees on their business credit cards. Beyond the problems faced by consumers, small-business owners are also hit with rising interchange fees (the costs card issuers charge businesses for accepting credit and debit cards).
Despite these burdens, BusinessWeek reports, the Federal Reserve Board declared that giving small businesses the same credit card protections consumers have would not be worth the potential for higher costs and reduced credit.
What’s the rationale? The report notes that since small businesses generally have higher credit lines than do consumers, banks have a harder time assessing the risks of extending small businesses credit. If banks’ ability to raise interest rates were to be limited, banks would likely protect themselves by restricting access to credit even more and charging higher initial interest rates, both of which would ultimately harm small-business credit-card users.
Bank lobbyists, not surprisingly, supported the Fed’s recommendation.
Would restricting banks’ ability to raise rates really hurt business credit-card use? Bank of America already announced in April it would extend the same protections included in the CARD Act to its small-business credit card users.
Small business credit cards account for only 15 percent of credit card spending, according to research firm Mercator Advisory Group. Data from the Fed report show that, rather than using credit cards as a “credit line,” most small businesses pay off their cards in full every month.
However, the Fed’s report indicates there is some cause for alarm: The share of business owners that carry a monthly balance on small business credit cards has more than doubled between 1998 and 2009, from 5.9 percent to 12.3 percent. Given the Fed’s recommendations, those card users shouldn’t expect relief anytime soon.
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Small businesses represent a higher level of “risk” to banks, so of course they want to be able to ratchet up fees and rates so they can reduce their risk. Of course this comes at the expense of small businesses who are already managing a lot of risk.