When it comes to credit cards, there are a LOT of options out there. In fact, you probably get “pre-approved” credit card offers in the mail daily, not to mention the ads that come in through email and other sources. If you own a business (or are thinking about starting one) the possibilities multiply.
Never mind the fact that there are dozens of banks and financial institutions that offer credit cards and each bank usually offers several different cards for people in different situations. For the purpose of pure simplification, these cards can be divided into 3 groups: corporate cards, small business cards, and personal cards.
If all these credit cards look pretty much the same to you, you’re not alone, but there are key differences that aren’t visible at the surface.
Corporate Credit Cards: These cards are often used by corporations, non-profits, or other large organizations. They are offered through a well-established business-bank relationship and interest rates and approval are based on the business’ credit score. Frequently these cards and their perks are customized to the organization.
Small Business Credit Cards: These cards are often used by small business owners and some start-up employees. These cards are offered as stock credit card plans the bank has established and planned to sell. Interest rates and approval are originally based on the business owner or user’s personal credit score but will help build a business’ credit history.
Personal Credit Cards: These cards are used by individuals and cannot be used to build a business’ credit history. Interest rates and approval are based solely on the individual’s credit score and will build only the individual’s credit history. These cards offer protections for consumers against unfair credit practices under the CARD Act of 2009.
Personal Cards Offer Protections
Whether this is news to you or you are familiar with these regulations, it’s always a good idea to go over and understand your rights and protections.
One of the major protections the CARD Act offers is the protection from unexpected rate increases. According to the Consumer Financial Protection Bureau or CFPB, “Prior to the enactment of the CARD Act, it was quite common for credit card companies to raise customers’ interest rates, including the rates applied to existing balances. Often the hike was put into effect with little or no advance notice.” The CARD Act prevents card companies from raising your rate on an existing balance unless you miss 2 consecutive payments and only allows them to raise the rate on future purchases if they give you 45 days notice, allowing you time to close the account.
Another protection of the CARD Act is the restriction on late and overlimit fees. Before 2009, card companies would charge late fees for a variety of reasons and the fees would often be greater than the harm or risk caused by the action.
The CARD Act requires companies to have credit card bills “due on the same date each month and payments received by 5:00 p.m. on the due date must be treated as timely. Card issuers generally cannot charge a late fee unless consumers are given at least 21 days to pay their bill,” says the CFPB. It also restricts late fees to a “reasonable and proportional” amount, usually $25-$35 and may not exceed the minimum payment. Overlimit fees are now prohibited unless the card user opts in, and the CFPB says that a year after the CARD Act was put in place, “overlimit fees dropped from approximately 12 percent per year to about 1 percent.”
The last major protection the CARD Act provides is arguably the most important, and probably the one that is noticed most often. That is the requirement of credit card companies to provide information about how long it will take to pay off a bill if only the minimum is paid, how much interest is being paid and how much it would cost to pay off the bill in 3 years.
According to a consumer survey conducted by the CFPB, 31 percent of cardholders who recall seeing the new information on their statement report that this information has caused them either to increase the payments they make or to reduce their use of credit.”
Other Cards Do Not Offer Protections
[pullquote]Business credit cards were excluded from the 2009 CARD Act and have not generally enjoyed the safeguards and protections offered by consumer cards.[/pullquote]
It is important to note that these protections DO NOT apply to corporate and small business credit cards. As Elliot Richardson, CEO of the Small Business Advocacy Council says, “Business credit cards were excluded from the 2009 CARD Act and have not generally enjoyed the safeguards and protections offered by consumer cards. This left many small business owners and entrepreneurs driven to obtain personal credit cards for their business.”
This may have you wondering why it is important to have these protections on a business credit card. The answer lies in how business credit cards are approved. “Business owners are often required to personally guarantee credit cards used to operate their businesses,” says Richardson. “Without basic consumer protections, such as providing adequate notice to business owners before increasing rates, or applying rate increases only to new charges on a card, using a small business credit card can unreasonably put the personal finances of a small business owner at risk.” This means that if a credit card company increases your rate or otherwise abuses loopholes so that your business has trouble making the payments, the credit card company can go after your personal assets and damage your personal credit score.
Lisa Chu, owner of Black and Bianco uses a business credit card despite the lack of CARD Act protections, “I would advise all business owners to check their [business] credit card rates. A few credit card companies would offer a low intro rate and annual fees. However they would then increase those rates in a few years. It’s never a good idea to get stuck with a credit card that you cannot afford. From my personal experiences, if a credit card company would increase my interest rate I would call to cancel the card, usually the operator would decrease it back to my normal rate.” This requires you to keep a very close eye on what your rates are, when your bill is due and take action quickly if any changes are made that might prevent you from keeping your account current.
From bank and credit card company advertising, you would never know that quite a few companies take advantage of their cardholders using practices that are banned for personal credit card accounts. “Credit card companies spend a great deal of money advertising to the small business community,” says Richardson of SBAC. “These commercials extol the virtues of running small businesses and make it clear that the credit card company is in their corner. The truth is that any credit card company that refuses to extend the basic consumer protections contained in the 2009 CARD Act to small business cards is not overly concerned with the success of small businesses.” Without protections of the CARD Act, it may seem like the best course of action when looking for a line of credit for business expenses is to apply for a personal credit card, but that may not be true.
Advantages to Business Credit Cards
There are some advantages to business credit cards that simply cannot be offered by personal credit cards.
Protect your LLC or Incorporated Business
The first major advantage to using a business credit card comes if your business is (or plans to become) incorporated or a limited liability company. Black and Bianco, mentioned earlier, is an LLC and owner Lisa Chu advised, “I would suggest all business owners small or big to all use business credit cards… to maintain the legal protections of their LLC. If you pay for business expenses with a personal card you would not be protected.” There are many ways to negate the protections your LLC provides, but mixing personal and business finances is the easiest mistake to make. Beth Laurence, on legal site NOLO.com, writes:
“An owner of a corporation can be held personally liable if he or she…treats the corporation as an extension of his or her personal affairs, rather than as a separate legal entity. In some circumstances, courts can rule that a corporation doesn’t really exist and that its owners should not be shielded from personal liability for their acts. This might happen if you fail to follow routine corporate formalities such as…keeping business records and transactions separate from those of the owners.”
Easily Track Expenses
Another smaller advantage is the ease of keeping track of expenses. With a business credit card “you would no longer need to hold on to receipts. When you do your taxes everything will be in your credit card invoice,” says Chu. With all your expenses listed in one place, separate from any non-business related expenses, you can easily see how much you spent and on what without sorting through your personal bills and expenditures. “This is especially important when several individuals or entities own a business,” says Richardson of SBAC. With one account to track business expenses, not only is it easier to explain to a business partner where all your funding is going, it is also easier to track purchases from multiple partners.
Build Your Business Credit
The last major advantage I’ll mention is the ability to build your business’ credit score. I’m sure you know the importance of credit scores, especially with all the companies formed around helping you monitor your score and keep it “healthy”. A business’ credit score is just as important, if not even more important. “A good score is essential if you plan on expanding your business with a bank loan,” says Chu. Since your approval and interest rate depends on your business’ credit score, the more you can build your credit history and show good payment habits through a high score, the less you will be paying for your loans in the long run.
So what are your options when looking for a business credit card? Well you can take the route that Lisa Chu took and keep close tabs on your business card accounts. Read the terms and conditions carefully before signing up for any card; they will tell you what to expect, if they are applying any of the policies of the CARD Act, and if there is a “teaser” rate on the card. Dana Dratch on CreditCards.com comments, “Some issuers voluntarily incorporate consumer protections into their policies. Others don’t. Bottom line: The fine print can make a difference in the real cost of using a business credit card.”Your other option is to choose a card that guarantees the same protections as personal cards like the MB Platinum MasterCard Business Card.
Still wondering why a card with protections is better for your business? Richardson explains, “Access to credit is one of the paramount challenges facing entrepreneurs and small business owners. While business owners must still qualify for the card, they will benefit from consumer protections that allow them to spend money on their businesses and not on paying unanticipated fees to a credit card company. This will allow businesses to grow and hire more employees.”
When to Apply
No matter which route you choose, it is recommended you apply for a business credit card as soon as your business opens, as Chu did, following her father’s advice. “My father owned his own business and he always told me to keep my personal finances separate from my business. I applied for a business card a few weeks after my business was opened.” As soon as you are making significant purchases for your business, make sure you have a designated business card so you can keep track of every expense from the beginning, however many cards require you to provide a federal Employer Information Number or EIN, so make sure you leave enough time to register and receive your number.
I’m sure you’re simply overloaded with more information than you could ever want about credit cards, as any business research session should end. Hopefully though, you have come away at least knowing what you are getting yourself into in the business credit card world. I’ll leave you with one last bit of advice from Lisa Chu, “Remember business cards are for you to build your business credit, keep track of your expenses and make it a breeze when filing for your taxes.Use [your] credit card wisely. Do not think you can use your business credit card as your personal shopping spree. Even if your business is heading toward bankruptcy. If the IRS suspects misuse of business funds, they will audit your business and you will have to pay every cent back.”
Getting your first business credit card can be a major accomplishment for your business, just remember every card (even personal cards) can be dangerous if used unwisely.