Advertiser Disclosure: The credit, charge and prepaid card offers that appear on this website are from card companies which MoneyRates.com receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). The site does not include all card companies or all available card offers.

Business owners targeted by credit card companies

January 27, 2011

| Money Rates Columnist

Small business owners, troubled by lingering high interest rates and the lack of protections against even higher punitive rates, are using their business credit cards less to keep their businesses operating during lean periods.

According to the National Small Business Association, credit cards were once the most common source of financing for small businesses, which often don't qualify for traditional bank loans to help tide them over during lean times. But credit cards have since dropped in use to where they are now the third most-used source by such businesses. Where about half of all small businesses once relied on credit cards as a source of financing, now only a third do.

Credit card offers coming in the mail

That's not stopping credit card companies from going after small businesses with a new wave of low APR business credit cards. Experts say that's because credit card reform legislation excluded small business cards from restrictions on raising interest rates, making them a prime target for credit card companies looking to increase their revenue.

The jury is still out on whether business owners will respond. According to the Los Angeles Times, qualifications for credit are stricter than they used to be, and interest rates for business credit cards grew faster in 2010 than for other credit card rates.

To make matters worse, interest rates can go as high as 29.99 percent if the cardholder is late on even a payment. While under the new regulations consumers can reduce their penalty rate if they make future payments on time, however small business owners can see that rate stay high.

That's because small businesses pose a high risk for credit card companies. An already high failure rate for small businesses has been increasing in recent years, and these small operations are more likely to need high credit limits.

Credit card rate caps likely to fail

In 2009, the federal government passed a law forbidding credit card companies from arbitrarily increasing interest rates, and additional consumer credit card restrictions are on the horizon. According to the Wall Street Journal, Rep. Maurice Hinchey, a Democrat from New York, has introduced a bill to cap credit card interest rates at 15 percent. Hinchey said higher credit card rates amount to "legalized loan sharking" and are forcing Americans into bankruptcies that could be avoided if they didn't face soaring credit card debt.

Opponents don't expect the bill to pass, however, because Republicans who oppose it own the majority of the House. Other critics point out that interest rate caps would likely prevent high-risk borrowers from getting any kind of credit card at all because companies would refuse to take a risk on them. High-risk borrowers agree to pay high interest rates because they need the money, and in some cases they use the loan to traverse a rough patch of financial ground and eventually pay the debt down and qualify for lower interest rates.

Your responses to ‘Business owners targeted by credit card companies’

Showing 0 comments | Add your comment
Add your comment
(will not be published, required)