DFS Discover Financial Services

Are U.S. credit card users protected now? The answer depends on the type of credit card they are holding. If it's a small business credit card, which is easily available for customers who do not own even a small business, the risk of facing awful practices by credit card companies is huge. A study released by the Pew Charitable Trust's Safe Credit Card Project on Wednesday conveys this fact.

The small business credit cards are exempt from the CARD (Credit Card Accountability, Responsibility and Disclosure) Act, which was signed into law by President Obama in 2009 to protect credit card users from unreasonable late payment fees, unpredictableinterest rate hikes and other penalty fees.       

According to the director of Pew Charitable Trust's Safe Credit Card Project, the credit card companies send more than 10 million business credit card offers to households covering all income levels every month.

 

So, the acceptance of the offer by a significant number of customers is quite possible as many Americans start or operate small businesses from their residences. Obviously, the offer will rope in a large number of customers as Americans wish to start or operate small businesses from their residences.

There’s a hidden story here. Not every customer will read the clauses on card applications carefully. When the time comes to pay the bill, they might be badly surprised by unforeseen interest rates, penalty fees or other charges for their business credit cards.        

Though some big banks are transparent with respect to their small business credit cards and comply with the new regulations willingly, most of the card companies scheme to trap customers taking undue advantage of the gap in regulations and carrying out prohibited practices.

Key Study Results

Pew Charitable Trust's Safe Credit Card Project scrutinized 12 largest credit card companies’ business credit card offerings. Here are the key findings:

• Of the total business cards under study, 80% included a clause under which issuers can alter terms and conditions at any time at short or no notice.

• There are late fees for 73% cards and over-limit fees were imposed by 67% card issuers.

• 67% cards include penalty interest rates for late payments or over-limit transactions. These penalty rates will be applied without notice and on any balance.

• For 84% cards, issuers have the authority to accept payments for low-rate balances first. The intension is primarily to maximize charges on higher-rate balances.

Some card issuers including Bank of America Corp. (BAC) and Capital One Financial Corp. (COF) have opted to rule out many of these practices for their business cards.

Why This Circumvent?   

Though the CARD Act was aimed at protecting the average consumer, it is threatening the profitability of major card issuers including Bank of America, JPMorgan Chase & Co. (JPM), Capital One and Discover Financial Services (DFS), since issuing credit at a rate suited to a customer’s risk is a complex process now.

As a result, the only way to earn some revenue is through small business credit cards, which are off the regulatory hook.

The Way Ahead

The best way to dodge issues related to a small business credit card is being extra careful before choosing it for a retail transaction. But, the government should compel issuers to follow the existing rules for all credit cards that are used for personal or household expenditures.  

Despite several drawbacks, credit cards play a vital role for consumers as they help provide liquidity to maintain daily transactions. Though a hefty credit card debt could hurt the economy, the hard fact is that we live in a consumption society, and cannot possibly live without them. Also, in a capitalist nation like U.S., lower credit card transactions will resist economic growth.

Though an uphill task, it would perhaps be better to try and make the household credit cards trouble free.

 
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