by Tim Chen, CEO of NerdWallet
As a small business owner, your credit card can be your best friend, or your worst enemy. While shopping around for the right card is important, educating yourself about potential pitfalls is equally so. Recent changes in credit card regulation to protect consumers do not apply to business cards, leaving small business owners unprotected and making it even more critical that you learn how to use your business credit card.
The Credit Card Accountability Responsibility and Disclosure Act of 2009
Also known as the CARD Act, this legislation was designed to protect consumers from lack of transparency in the credit card industry. Among its more notable provisions, the CARD Act limits the ability of banks to increase interest rates and charge exorbitant penalties when consumers pay late. The legislation also mandates that companies give consumers 45 days’ notice before increasing interest rates and that they allow consumers to cancel the card and pay off any remaining balance at the old interest rate. On top of all this, the CARD Act prohibits billing due dates from falling on weekends, or any holiday on which the company does not accept payment. It also protects cardholders from misleading terms, requiring that companies stick to set definitions of terms like “prime rate” and “fixed rate.”
Unfortunately, the new regulations don’t touch business credit cards, leaving small business owners unprotected from the card companies’ gimmicks. The rationale is two-fold: first, because businesses generally have higher credit limits, banks argue that imposing regulations on penalties and interest rate hikes would leave them unable to protect themselves from the heightened risk and force them to deny credit to more businesses. Second, business owners are supposed to be savvier than average consumers, better able to understand card company lingo and protect themselves accordingly.
What does it mean for you?
Maybe the most important thing to remember is that you can’t expect your business card to behave like your personal card. There’s no need to be afraid of using a business credit card––in fact, using one wisely can be a real financial asset––but be sure to bone up on your knowledge of the card companies’ traps so that you can avoid pitfalls.
Right about now, you may be thinking that your small business will be better off if you cover expenses with a personal credit card. Maybe. Remember, though, that combining business and personal expenses can lead to tricky bookkeeping and taxes down the line. Besides that, you’ll miss out on small business credit cards that offer rewards geared for business expenses, which in some cases reach 5% cash back in common business spending categories. Business credit cards aren’t necessarily harmful, as long as you use them correctly.
Pay on time to avoid interest rate hikes and penalties
As a business card holder, you aren’t protected from immediate and sustained increases to your interest rate if you make a late payment. Be vigilant about keeping track of due dates, and pay on time. If you don’t, it can cost you in both the short and long term. In addition to rate hikes, credit companies are still allowed to charge steep one-time penalties to cardholders who pay late.
Read the fine print, and understand it
For all their sweet-talking, credit card companies don’t have your best interests at heart. They’re here to make a profit, and they’ll make more of one if you carry a balance or make a late payment. Be careful when shopping for a card to read the terms and conditions carefully. If there’s anything that’s not a hundred percent clear, dig deeper, ask questions, do a little more research. Understanding exactly what you’re agreeing to will go a long way toward helping you fulfill your end of the bargain, thereby avoiding unpleasant surprises down the line.
Choose the right card for your business needs
Make sure you choose the card that best fits your business needs. Just as with personal credit cards, credit cards for business owners aren’t all created equal. If you’re using your credit card to finance your small business, you’ll want to prioritize finding a card with a low interest rate, whereas people whose businesses are off the ground and paying for themselves will benefit from a business card that offers rewards on company-related expenses. Make sure to identify your needs before you go card shopping so you can ensure that the card works for you.
Tim Chen is the CEO of NerdWallet, an unbiased resource for business and personal credit cards.