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APR Hikes Ambush Biz Owners

Card issuers have changed the rules. Do you know how to protect your rate, and take action if necessary?

Doug Carpenter isn't a lawyer or a banker, nor does he work for a government agency or a consumer watchdog group. So why is the owner of a part-time, home based computer business in Cleveland, Tenn., so well-versed in the minutiae of an appellate court case in New Jersey, usury laws in Utah and the contents of American Banker magazine?

Such esoteric pursuits are a form of self-defense for Carpenter, who is among a growing number of frustrated small business credit card holders to be victimized by what he terms "rate-jacking"--unexpected, seemingly unwarranted and significant credit card interest rate increases imposed with little or no notice.

Relief, But When?

New measures to keep credit card issuers from bullying card holders are due to take hold in 2010, but that's not soon enough for small business advocates such as Todd McCracken, president of the National Small Business Association.

McCracken and the NSBA are urging Congress to adopt legislation that would backstop regulatory changes enacted late last year by the Federal Reserve Board and other government agencies. The regulations included in the so-called Unfair or Deceptive Acts or Practices rule are a positive step, says McCracken, but their July 2010 implementation date "is not quite soon enough" to provide relief when small businesses need it--today. He's supporting Credit Cardholders' Bill of Rights legislation introduced this winter by two New York Democrats, Charles Schumer in the Senate and Carolyn B. Maloney in the House. "There just aren't adequate levels of clarity and a system of acceptable practices and rules with credit cards as there are for the rest of the banking industry," McCracken contends.

The legislation would ban practices such as universal default, double-cycle billing and retroactive rate hikes unless a cardholder is more than 30 days late in paying. Many of the same prohibitions are part of the new UDAP regulations. But as McCracken notes, "rules are more easily undermined than legislation."

The timing could be better for already shell-shocked small-business owners, who nowadays must rely more than ever on plastic to cover their cash flow and capital needs in light of tightening credit markets. In a survey, the National Small Business Association reports that 49 percent of its members used credit cards in the past 12 months to finance their businesses, an increase of 20 percent. Meanwhile, 69 percent reported that the terms of their credit cards are worsening.

"A lot of small businesses that operate on the edge financially, like contractors, are really getting killed by [APR] increases," Carpenter says.

No longer are rate-jacking victims mostly tardy bill-payers. Even business owners like Marilyn Landis are being ambushed. Landis and others pay their bills on time, have strong credit scores and painstakingly comb through all communications from their credit card companies; yet, their rates are going up. Landis is an unusual case, having spent 30 years in the banking industry prior to founding Basic Business Concepts Inc., a Pittsburgh, Pa., firm that provides CFO services to businesses.

Like many of her clients of late, Landis is a rate-jacking victim. She says the issuer of her business credit card shortened the payment window on her card by six days over a six-month span, without notice or explanation. "The most diligent, most careful business owners are still getting hurt," says the former NSBA chair. "You think you're in control. But when you have a contract that can and does change at will, without notice, there's no way of knowing what's going to happen next. It's a bit like Alice in Wonderland."

Federal regulators and lawmakers appear bent on putting an end to unfair and abusive practices by credit card companies (see the sidebar); the NSBA has even made credit card reform one of its top priorities for 2009. But for many small-business owners, the damage has been done. After seeing the APR on her business card jump from 4 percent to 14 percent to 31 percent in a three-week span, despite consistently paying her bills on time, Ashleigh Farrell, who with her husband owns two small companies in Denver, 5280 Home Construction and Bella B Maternity, stopped using the card altogether. "Luckily," she says, "I've been able to finance the maternity company with our construction company."

Business owners who lack that flexibility aren't so lucky. Carpenter has seen drops in both his personal credit score and his business card credit limit in the wake of a dispute he had with a card issuer over an APR increase of 20 percent that he claims came without warning or justification.

The internet is awash with complaints from disgruntled rate-jacking victims. And now there are strong indications that class-action suits against card-issuing institutions are afoot. But litigation takes time and money. What steps can you take now to avoid rate-jacking? And if it does happen to you, what can you do to minimize the damage? Here are some battle-tested--though certainly not fool-proof--suggestions to avoid APR increases:

  • Keep month-to-month balances low. "Don't put more on a card than you can pay off in two or three months," says Frank Ford, founder of Frankford Financial, a Louisiana firm that tracks and analyzes the credit card market.
  • Get a card from a local bank or credit union, and try to forge relationships with people at the institution. "If they know you personally," Ford says, "they should be more inclined to work with you when a situation arises with a credit card."
  • Read the fine print of every communication from the card issuer. Unpleasant surprises may lurk within that microscopic type.
  • Resist the temptation to switch cards to take advantage of an attractive special-offer APR. Changing credit cards should be a last resort, Landis says, because doing so likely will lower your business (and personal) credit score, which can result in unfavorable changes to the terms of other cards in your wallet. "In trying to improve your situation, you might make it worse."
  • Perform due diligence before applying for a card. Search government and consumer sites (fdic.gov, bbb.org, my3cents.com) for the scoop on card issuers. Ask fellow business owners about the track records of the card issuers they use.
  • Until new protections for card holders take hold (see the sidebar), Landis recommends staying beneath the card issuer's radar by making minimum payments on time and paying cash whenever possible to avoid inflating your balance.

    If the plastic hits the fan and it's time to take some action, try these steps:
  • Go directly to a customer service supervisor, bypassing the service rep. "In this environment, they want to work with you. They don't want to lose your business, especially if you have been a good customer," Ford says.
  • If you think you've been unfairly treated by the card issuer, register complaints with the state Better Business Bureau and with federal entities such as the FDIC. "It was the BBB that was the most help to me," Carpenter says.
  • Document in great detail all correspondence and interaction between you and the card issuer.
  • Stay calm and remember, relief is coming. "My advice," Landis says, "is to hunker down and weather this out because the rules are changing for the better."

David Port is a freelancer based in Denver who writes on small business, and financial and energy issues.

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