WalletHub’s 2011 Small Business Credit Card Study examined the flawed exclusion of business credit cards from CARD Act protection given the distinct similarities between business and consumer credit cards in terms of both personal liability and credit reporting practices. It further explored the extent to which major credit card companies proactively applied CARD Act protections to their business credit cards as a result of this curious, somewhat inexcusable oversight on the part of legislators.
The 2012 Small Business Credit Card Study builds upon these findings, exploring changes made by issuers over the last 12 months in regards to business credit card liability, credit reporting, and CARD Act protection.
The Key Findings of the 2012 Small Business Credit Card Study are as follows, and more detailed results can be found below them:
- All of the major credit card companies hold their customers personally liable for business credit card use.
- At least six of the top 10 issuers relay business credit card usage information to cardholders’ personal credit reports.
- Citibank is the only major credit card issuer not to report business credit card activity to customers’ personal credit reports.
- As was the case in 2011, the only issuer to receive a 100% score in the CARD Act protection category is Bank of America, largely because it remains the only top 10 issuer to prohibit arbitrary interest rate increases on its business credit cards.
- Capital One followed BofA, garnering second place in the CARD Act protection category with a score of 60%, and American Express ranked third at 45%.
- The lowest scoring issuers in the CARD Act protection category were HSBC and U.S. Bank, both of which scored 0%.
- All of the issuers that participated in this study, with the exception of HSBC, stated that they do not use double cycle billing or universal default, two of the most controversial practices that have been outlawed in the consumer space yet are still theoretically allowed in the business space.
- Issuers are trending toward either maintaining or extending voluntary CARD Act protections rather than repealing them.
- On the whole, the major credit card companies are more transparent about their business credit card practices in 2012 relative to 2011.
The detailed results of the 2012 Small Business Credit Card Study are broken down into three primary sections:
- Business Credit Card Liability and Credit Bureau Reporting
- Business Credit Card CARD Act Protections
- Issuer Transparency
Business Credit Card Liability and Credit Bureau Reporting
Through examination of published credit card applications as well as direct contact with representatives of the 10 largest credit card issuers, we discovered that all major issuers hold both individual owners and their small businesses liable for use of a business credit card. What’s more, at least six of these issuers make it a practice to report business credit card usage information to their cardholders’ major credit reports.
Please find our issuer-specific findings in the table below.
Issuer | Cardholder personally liable? | Usage information relayed to cardholder’s personal credit reports? | Changes from 2011 |
---|---|---|---|
American Express | Yes | Yes, when the account is cancelled and seriously delinquent | None |
Bank of America | Yes | Yes, when the card holder is more than 60 days delinquent | None |
Capital One | Yes | Yes | None |
Chase | Yes | Yes, when the card holder is more than 60 days delinquent | In 2011, Chase did not have the 60-day delinquency requirement for reporting business credit card usage information to customers’ personal credit reports. |
Citibank | Yes | No, but business credit card payment history may impact ability to obtain approval for a Citi consumer credit card. | Citi used to report business credit card usage information to personal credit reports for its professional card, which is no longer available to new applicants. |
Discover | Yes | Yes, when the account is cancelled and seriously delinquent | None |
HSBC | Yes | Declined to respond | None |
USAA | N/A (does not offer a business credit card) | N/A | None |
U.S. Bank | Yes | Declined to respond | None |
Wells Fargo | Yes | Yes, when the account is in default | Wells Fargo did not participate in 2011 and therefore provided important insights into their practices this year, including the fact that credit card usage is reported to the Small Business Financial Exchange (SBFE) business credit bureau on a monthly basis. |
Takeaways:
First of all, the term “business credit card” is misleading. One would logically assume that eligibility for such a card would be based on a business’ credit worthiness, that liability for its use would fall squarely on the business itself, and that information about both its use and misuse would be solely expressed in the business’ credit reports. However, as this study illustrates, each of these assumptions would be false. It therefore seems that “business credit card” is merely a branding term used by credit card companies to segment their products and is not an indicator of any fundamental difference relative to other card types. As a result, the moniker “business credit card” should be replaced (with “professional credit card,” perhaps).
Secondly, in light of how fundamentally consumer oriented business credit cards are, one could make the argument that the CARD Act should indeed apply to them. There are three viable scenarios for the extension of the CARD Act to business credit cards:
- Federal regulators can realize the confusion and imbalance created by the current application of the CARD Act and step in to make adjustments. By simply ignoring labels and applying consumer protections to any type of credit card for which an individual, rather than a corporation, is responsible, a more commonsense system will result.
- Small business owners can essentially take it upon themselves to apply CARD Act regulations to their business spending by simply using personal credit cards for all company expenses that lead to a monthly revolving balance.
- Instead of waiting for inevitable outside regulation, credit card companies can proactively apply CARD Act provisions to their business credit card offerings. Doing so would not only improve the industry’s image, it would indicate to regulators that issuers can police themselves and would therefore take them out from under the federal microscope.
Business Credit Card CARD Act Protections
Given the inevitability of the CARD Act eventually being applied to business credit cards, we also investigated the extent to which the 10 largest credit card companies in the US have proactively extended the law’s protections.
In light of the wide range of CARD Act regulations, we narrowed the scope of this investigation to only those protections we deemed most useful to small business owners. In addition, we assigned a weight to each protection in order to more easily compare the overall efforts of each issuer. The breakdown is as follows:
- An increased interest rate/penalty APR cannot be applied to an existing balance unless the cardholder is at least 60 days delinquent: 40%
- No double cycle billing: 15%
- No universal default: 15%
- Issuer must provide 45 days notice before changing terms of card agreement: 15%
- The amount of a payment that is above the minimum must be applied to the balance with the highest interest rate: 15%
Each issuer will therefore receive a score ranging from 0-100, which reflects the extent to which it has applied the most important CARD Act protections to its business credit cards. Credit card companies that refused to participate in the study or that gave vague answers (e.g. “we comply with current laws”) automatically received a score of “0” because based on our experience, companies that go above and beyond what is required of them are typically quite forthright and are eager to discuss what sets them apart.
Please find a summary of results in the table below:
Please find a detailed breakdown of these findings following the “Takeaways” section.
Takeaways:
Collectively, issuers must do a far better job at proactively applying CARD Act protections to their business credit cards. As things are now, the business credit card market is top heavy. Bank of America is clearly head and shoulders above the other top 10 credit card companies in doing so. Next comes Capital One, which has done a pretty good job of applying some aspects of the CARD Act to its business credit cards, but the fact that it has yet to extend protections against interest rate increases on existing balances indicates that it still has significant room to improve.
Then there’s the middle of the pack: American Express, Citibank, Chase, Discover, and Wells Fargo. All have applied at least a couple of the most important CARD Act protections to their business credit card offers and are therefore superior to HSBC, who does nothing more than comply with current laws, though they were transparent about this fact.
Finally, there’s U.S. Bank, which ranks last in our study. Not only do they refuse to be upfront about their policies, as if prospective customers do not have a right to know what to expect from their products, but there is also no indication that they are doing anything more to protect their business credit card customers than is required by the letter of the law. Until more issuers decide to truly step up and improve their business credit card offerings significantly, Bank of America will gain a dominant position among well-informed small business owners who want to use a business credit card to fund their companies.
It is also important to note that the longer industry leaders wait, the more likely it is that their customers will rely on personal credit cards for business spending. Not only will this cost their business credit card divisions money, but the banks themselves will also be privy to less useful underwriting information as a result. When a consumer applies for a business credit card, he is required to provide information about both his personal and business finances. This information, along with the simple fact that the customer’s spending is business oriented, is lost when that consumer chooses to open a personal credit card instead.
It is therefore actually in the best interest of credit card companies to apply CARD Act protections across the board. Doing so will foster both improvements in business credit card underwriting and more thorough competition in the business credit card space.
Detailed CARD Act Protections By Issuer:
American Express, Total Score: 45%
- No arbitrary interest rate changes on existing balances: Not adopted (0%)
- No double cycle billing: Adopted (15%)
- No universal default: Adopted (15%)
- 45 day change-of-terms notice: Adopted (15%)
- Payment allocation: Not adopted (0%)
In addition, American Express implemented the following CARD Act regulations: redesigned statements that make information about balances, payment due and interest rates clearer; late payment warnings included on statements; online card agreements; a 25-day grace period between when a bill is made available and when payment is due; uniform payment due dates; deadline for same-day payment processing extended to 5 p.m.
Bank of America, Total Score: 100%
- No arbitrary interest rate changes on existing balances: Adopted (40%)
- No double cycle billing: Adopted (15%)
- No universal default: Adopted (15%)
- 45 day change-of-terms notice: Adopted (15%)
- Payment allocation: Adopted (15%)
In addition, Bank of America implemented the following CARD Act protections: a 25-day grace period between when a bill is made available and when payment is due, statements that include rates for purchases, balance transfers and cash advances, payment information to keep accounts in good standing and a summary of fees.
Capital One, Total Score: 60%
- No arbitrary interest rate changes on existing balances: Not adopted (0%)
- No double cycle billing: Adopted (15%)
- No universal default: Adopted (15%)
- 45 day change-of-terms notice: Adopted (15%)
- Payment allocation: Adopted (15%)
In addition, Capital One implemented the following CARD Act protections: 25% of credit line fee limits, assurance that introductory rates will last for at least six months, uniform statement availability and due dates, the inclusion of required minimum payment on statements, and the abolition of pay-by-phone fees. What’s more, the only way Capital One small business cardholders can trigger the penalty default rate is if they pay late multiple times (by 3 or more days) in a 12-month period. If the cardholder makes 12 consecutive on-time payments, they are automatically returned to their previous rate.
Chase, Total Score: 30%
- No arbitrary interest rate changes on existing balances: Not adopted (0%)
- No double cycle billing: Adopted (15%)
- No universal default: Adopted (15%)
- 45 day change-of-terms notice: Not adopted (0%)
- Payment allocation: Not adopted (0%)
In order to give small business customers increased financial control, Chase voluntarily implemented rules requiring: fixed statement and payment due dates each month; free online and phone payments; minimum payment warnings and late fee/penalty rate warnings on statements; that promotional rates be at least 6 months in duration; that account must be open for 1 year before non-penalty changes to terms; and that customers have the right to reject fees on new accounts. In addition, Chase plans to implement later this year a requirement that necessitates at least 45 days’ notice be given in advance of key account terms being changed.
Citibank, Total Score: 30%
- No arbitrary interest rate changes on existing balances: Not adopted (0%)
- No double cycle billing: Adopted (15%)
- No universal default: Adopted (15%)
- 45 day change-of-terms notice: Not adopted (0%)
- Payment allocation: Not adopted (0%)
Discover, Total Score: 30%
- No arbitrary interest rate changes on existing balances: Not adopted (0%)
- No double cycle billing: Adopted (15%)
- No universal default: Adopted (15%)
- 45 day change-of-terms notice: Not adopted (0%)
- Payment allocation: Not adopted (0%)
Discover implemented the following CARD Act protections: no pay-by-phone or over-limit fees and a 25-day grace period between when a bill is made available and when payment is due.
HSBC, Total Score: 0%
- No arbitrary interest rate changes on existing balances: Not adopted (0%)
- No double cycle billing: Not adopted (0%)
- No universal default: Not adopted (0%)
- 45 day change-of-terms notice: Not adopted (0%)
- Payment allocation: Not adopted (0%)
USAA, Total Score: N/A
This issuer does not offer a business credit card.
U.S. Bank, Total Score: 0%
This issuer refused to participate in the study, and there was no indication on its website that it had extended any CARD Act protections to its business credit cards.
Wells Fargo, Total Score: 30%
- No arbitrary interest rate changes on existing balances: Not adopted (0%)
- No double cycle billing: Adopted (15%)
- No universal default: Adopted (15%)
- 45 day change-of-terms notice: Not adopted (0%)
- Payment allocation: Not adopted (0%)
While Wells Fargo has not fully adopted a few of the most important CARD Act protections, it has taken certain intermediary steps. For example, it will only increase a business cardholder’s APR in the event of two or more delinquencies within 12 months, and customers can return to lower rates when they improve their payment histories and have fewer than two delinquencies in the 12 months following the initial change. In addition, Wells Fargo gives its business credit card customers at least 30 days’ notice before changing key account terms, and customer payments are usually applied to lower-rate balances before higher-rate balances, with the exception of Overdraft Protection Cash Advances, which are paid before any other principal despite generally having higher rates.
Issuer Transparency
Transparency on the part of credit card companies is extremely important, as it enables consumers to make truly educated decisions about the cards they use. Not only that, but a lack of transparency could also indicate that a company has something to hide, and given the negative impact of bait-and-switch credit card company tactics on consumers during the Great Recession, a less-than-forthcoming issuer might understandably give a potential customer pause.
We therefore felt it necessary to rate issuers based on their transparency. Issuers who provide information about both their business credit card liability/credit reporting practices and their voluntarily extended CARD Act protections receive a rating of “Good;” those who provide information about only one of these topics receive a “Mediocre” rating; and those who do not make information about either topic available receive a “Bad” rating.
Issuer | CARD Act Protections Score | Changes from 2011 |
---|---|---|
American Express | 45% | None |
Bank of America | 100% | None |
Capital One | 60% | Capital One this year shared specific criteria dictating interest rate increases (see issuer breakdown below). |
Chase | 30.00% | Chase plans to require advance warning for changes to account terms later this year. |
Citibank | 30% | None |
Discover | 30% | Discover was more forthcoming this year about not using double cycle billing or universal default |
HSBC | 0% | None |
USAA | N/A (does not offer a business credit card) | N/A |
U.S. Bank | 0%, declined to participate in study | None |
Wells Fargo | 30.00% | Wells Fargo does not use double cycle billing or universal default. |
Takeaways:
For starters, it seems that the major credit card companies are altogether more transparent in 2012 than they were in 2011. All but one (US Bank) were forthcoming about their business credit card policies, which indicates that issuers are beginning to understand the aversion consumers have to shady practices and the importance they place on knowing what they’re getting themselves into.
This trend mirrors a progressively pro-consumer credit card market, in which issuers seem to be listening to consumer feedback and adjusting their products and practices accordingly. For example, in response to consumers’ affinity for 0% credit cards, issuers are lengthening 0% introductory APR terms and are compensating by increasing regular rates. Similarly, the no foreign transaction fee credit card market is growing in accordance with consumer recognition of these fees and their desire to avoid them.
More specifically, Wells Fargo exhibited the biggest changes in terms of transparency from 2011 to 2012. Not only did Wells Fargo participate in the 2012 Study after refusing to do so in 2011, but they also provided very helpful details about their business credit card reporting practices. Wells Fargo reports business credit card usage information to the Small Business Financial Exchange (SBFE) business credit bureau on a monthly basis and only relays such information to customers’ personal credit reports in cases of default.
Finally, US Bank remains at the back of the pack as far as transparency is concerned. In light of the increased emphasis on financial companies being open and accountable following the Great Recession, this is certainly worrisome. Consumers may assume there is a reason US Bank does not want to share how it uses their data or how they recoup funds owed in the event of default, and since these things could very well affect one’s personal credit standing and personal finances, it is unlikely that people will blindly accept US Bank’s secretive approach. With the rest of the top 10 issuers trending toward greater transparency, this certainly puts US Bank at a competitive disadvantage.
For questions or more information regarding this study, please contact our media department.
WalletHub experts are widely quoted. Contact our media team to schedule an interview.