News & Resources

Small businesses feel the pressure from Truth in Lending Act

Jul 13, 2011 Brian Bradley

In 2009, the federal government issued the Credit Card Accountability, Responsibility and Disclosure Act, protecting consumers against abusive credit card companies. However, the Act extended little protection to small business owners. Faced with the recession, many small firms have had to turn to their own personal credit cards in order to fund their ventures rather than relying on contentious business credit cards. AllBusiness reported that the Credit Card Act guidelines, revised under the Truth in Labeling Act, don't cover business or professional credit cards. Rather, an entrepreneur is required to cover all fees, charges and expenses associated with the card, which typically doesn't carry the same protections as consumer cards. On the consumer end, for example, banks are unable to change the terms of a credit card within the first year and must provide 45 days advance notice thereafter. Additionally, interest rates are banned on an existing balance unless a consumers' account falls into delinquency by 60 days or more. Furthermore, any penalty fees a company does impose must be "reasonable and proportional," the source noted, indicating that most firms stick to a $25 fee for a consumers' first violation and $35 for additional violations up to six months thereafter. Banks are also unable to charge a fee that's greater than the account balance, no matter how insignificant that it may be. None of these protections are extended to business credit cards, however. According to the Pew Charitable Trust's study, 80 percent of business credit cards include a provision for "anytime" change in terms, which removes the chance for companies to opt out. Additionally, 67 percent of cards feature a penalty for late payments and over-limit charges, the average of which comes at an annual percentage rate of 29.4 percent. This figure would be illegal for consumer credit cards. "Right now, having a business card is much riskier than having a consumer card," Beverly Harzog told MSN. "Say you're carrying a $5,000 balance at 13 percent interest, and suddenly your card issuer decides they're a little nervous about your account. If it's a business card, the issuer can raise your rate on your existing balance. You're at their mercy," she added.