Business credit cards may be too good to be true

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Cash is tight, so that new credit card application in your mailbox seems like a godsend, right?

Nice introductory rate.

Decent follow-up rate, especially considering your other limited borrowing options.

Cheap balance transfers.

Hefty credit limit.

Simple application that doesn’t ask too many embarrassing questions. You just have to promise to use the card for business expenses.

And it’s from a big-time credit card company, not some dinky, little country bank you’ve never heard of. Great opportunity.

OK, so let’s jump on this and get a little bit of breathing room until sales pick up.

Wrong. Wrong. Wrong. Be careful. Very careful. While the cards often are sent to consumers, they can be especially dangerous for cash-strapped small-business owners.

Here’s the trick: The so-called professional or business cards are not protected by the tough Credit Card Accountability and Responsibility and Disclosure Act of 2009 (or Card Act for short). The consumer protection law limits activities of credit card companies. Unfortunately, many of the law’s most important consumer safety provisions do not apply to business and professional credit cards. By pushing these cards on small-business people, credit card companies can get around some of the toughest provisions of the law. For example, these practices are banned by the Card Act for consumer cards but are legal for professional cards:

• Card issuers can apply payments in excess of the minimum to balances with the lowest rate. Balances with the highest rates on your professional card get paid last. That makes it tough to pay off those high-interest big balances. Good for the bank, not good for you.

• Card companies don’t have to give you 21 days after the billing statement is mailed to make a payment. This increases the chances of you sending in a late payment, which means you are charged a late fee and get kicked into the very, very high-interest category.

• Issuers can raise rates on your existing balance if you are late with a payment to another creditor. Obviously, this unfair domino effect could be very costly. That’s why it was outlawed on consumer cards.

• Card companies can’t increase rates on existing cards unless a consumer is 60 days late with a payment, but some professional cards don’t contain this provision. One professional card can raise your rate to 29.99 percent if you are even one day late with a payment.

• Issuers can change your card agreement without giving you advance notice.

Well, isn’t that cute?

Until recently, The Wall Street Journal reports, these professional cards had been limited to business owners and executives. “But since the Card Act was passed in March 2009, companies have been inundating ordinary consumers with applications,” it said in a recent report. In the first quarter of 2010, 47 million professional offers were sent out, an increase of 256 percent over the same period last year, according to the WSJ.

One card company, Capital One, told the newspaper that it has “voluntarily” applied many of the Card Act restrictions to its professional cards. A Capital One spokesperson told the newspaper, however, that it would continue to use “risk-based re-pricing” for small-business customers. I’m not certain, but I’m guessing that means they’re raising prices for small businesses.

At the same time, credit card companies are pumping up fees for foreign transactions. So the next time you’re off to Europe for that trade show, conference or buying trip, think twice about using your credit card. The fees might cost you a lot more than last time.

I don’t intend this to be an attack on credit card companies. I just want to tell small-business people to beware the next time they see what appears to be an attractive credit card offer and to make certain that the card is covered by the Card Act.

At the same time, these bankers do drive me crazy with their big-headline offers and their tiny-print restrictions.

In case you didn’t notice, credit card rates in the second quarter hit a nine-year high, according to a study by the market research firm Synovate. The average rate on existing credit cards in the second quarter hit 14.7 percent, up from 13.1 percent the previous year. This is a spread of 11.45 points between the average and the prime rate, the highest in 22 years.

I thought the economy was in a slump and bankers were going to get things going by priming the small-business pump. Oh, sure, now I remember. They’re doing it with “risk-based” lending, but sometimes they call it by another name. Like “professional” credit cards.

How could I forget?

This story originally appeared in the Dealernews October 2010 issue.