Small-Business Cards Now Carry Sizeable Risk
Banks can list your company's debt alongside your personal debt--lowering your credit score and loan worthiness.
Shortly after Byron Herbert started his business, Daytona Limos, in 2007, he applied for and received two business credit cards from Capital One (COF). With credit lines of $7,000 and $25,000, they were an invaluable tool in managing the cash flow of the Daytona Beach, Fl.-based limousine service.
However, in November, Hebert learned that the cards had one big downside: Capital One was reporting the accounts on his personal credit report. Listing his business' debt alongside and in the same manner as his personal debt gave the impression to anyone who checked his credit that he was overextended, Hebert says.
Capital One spokesman Steve Schooff says reporting the accounts to both the consumer and commercial credit bureaus is "standard industry practice."
Traditionally, that hasn't been the case. JP Morgan Chase (JPM) and American Express (AXP) say they check a consumer's credit report when they apply for a business credit card, but report the accounts to the consumer credit bureaus only if they become delinquent. The accounts are otherwise reported to the so-called commercial credit bureaus, including D&B and Experian's Small Business Services. Small-business owners appreciate the practice, because it allows them to use the cards for business expenses without worrying that they may appear heavily indebted on a personal level, says Gerri Detweiler, a credit adviser with educational web site Credit.com.
When a highly-utilized business credit card appears on a person's individual report, the negative effect could snowball quickly. For example, the addition of $20,000 of business debt to the $20,000 Hebert already owed on his personal credit cards led Bank of America (BAC) to close one of his personal credit cards and cut the limit of another, from $35,000 to $9,900, just $200 above his balance. As a result, Hebert's credit score, once in the high 700s, fell to the low 700s.
"What really gets me is that if I wanted to apply for a loan, I'd have to list my income--I can't list the company's entire gross revenues," Hebert says. "Yet the creditors will look at all the debt my business has, even if the company pays those credit cards."
Bank of America declined to comment on an individual case. Company spokeswoman Betty Reiss said the company monitors accounts for risk and may make adjustments accordingly.
Capital One is the first large issuer to start reporting business credit-card accounts that are in good standing to the consumer credit-reporting bureaus. And even if small-business owners deem the practice unfair, it is legal. Issuers can report business credit-card usage to consumer credit reports as long as they have the business owner's authorization to check their personal credit, says Gene Truono, a managing director with the consumer regulatory compliance banking practice at BDO Consulting. Typically, consumers grant that authorization when they apply for the card.
Business credit cards can be a valuable cash-management tool for small-business owners. They tend to have more generous credit lines and their rates are slightly lower than those associated with consumer credit cards, says Truono. But they have drawbacks that, once the CARD Act comes into effect February 22, 2010, will only get stronger. Here's what small-business owners should know before they sign up.
- Personal liability
Most--if not all--business credit cards include a personal liability waiver in their terms and conditions. By opening and using the card, you agree that, if the account becomes delinquent, the issuer can come after your personal assets for the balance. That includes any charges made by any business employees you designate as authorized users of the card.
- CARD Act immunity
The CARD Act does not apply to credit cards used for business purposes, says Truono. Although card issuers may elect to apply the same rules to their consumer and business-card portfolios to keep their operating costs low, that move will be a voluntary decision. So, as of Feb. 22, 2010, issuers will not be allowed to hike interest rates for existing balances on consumer credit cards, but they will still be able to do that with the credit cards issued to and used by businesses.
- A hit to your personal credit
Although most issuers do not report business credit cards to the consumer credit reporting agencies right now, they do report the accounts if they become delinquent. If times get tough for the business and the owner can't make a card payment, they have to dig into their personal savings in order to keep the account current--or risk a hit to their personal credit.
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