Via CNNMoney.com we learn that N.Y. Sen. Charles Schumer wants to force credit card companies to apply the same underwriting standards they use for issuing regular consumer cards to business credit cards. The recently passed CARD Act has placed a number of restrictions on what issuers can and cannot do regarding interest rates, fees and information disclosure, however the rules apply only to consumer cards.
Under the CARD Act, for example, if a cardholder is late on a payment, interest rates can only be raised if the delinquency is bigger than 60 days, and then only after the issuer has served a notice to its cardholder. Even then, the cardholder can opt not to accept the new interest rate, in which case he or she will have to close the account and repay the outstanding balance on the old rate. The CARD Act also limits the amount of penalty fees to the amount of the violation, but not to exceed $25.
These and other consumer protections do not apply to business cards and Sen. Schumer thinks that credit card companies are taking advantage of this loophole by making it too easy for consumers to get their hands on them. He’s asked Ben Bernanke, the chairman of the Federal Reserve, to do something about it. “I believe that credit card issuers are exploiting this distinction in order to evade the tougher regulations passed by Congress and preserve their ability to profit from unfair and excessive fees,” explained Schumer.
Schumer actually doesn’t want to amend the Act by extending its protections to holders of business cards, but rather to make them harder to obtain. One specific requirement he believes would help achieve this goal is to require issuers to collect Tax IDs from applicants. Currently, business card applications ask for little more than the business’ name, aside from the principal’s personal information. There are known instances of approved business credit card applications when a fictitious corporate name was provided.
Now, it is true that a consumer can open up a business credit card account fairly easily, but is that necessarily a bad thing? These cards are typically used by entrepreneurs and small business owners with limited access to business credit. Many of them do not have a Tax ID, using their social security numbers instead, so it would be difficult to prove that they actually own a business. It is true that credit cards are far from the ideal source of short-term capital, but for the most part entrepreneurs understand that and use it only when there is nothing better available, accepting the associated risks.
Placing additional hurdles in the application process will probably prevent some consumers from opening up business card accounts, but will also make that more difficult for small businesses. Even in the best of times entrepreneurs have plenty of issues to deal with and adding one more is not exactly helpful. Now is certainly not the best of times.
Image credit: Freeenterprise.com.