Credit Cardholders’ Bill May Lighten Load for Businesses

As House Speaker Nancy Pelosi and others are calling for the enactment of a second economic stimulus package in the lame duck session of Congress, small business advocates are making the case that such a measure should include legislation designed to make credit card terms friendlier to entrepreneurs.

The Credit Cardholders’ Bill of Rights Act, passed in September by the House of Representatives, would restrict certain practices by credit card issuers. Among them, it would prohibit interest rate hikes on existing balances under certain conditions, restrict card issuers from applying credit card payments to debts with the lowest interest rates first, and require banks to mail bills 25 days before the due date.

“Credit cards are now the largest source of financing for small business owners,” says Kyle

W. Kempf, senior director of government affairs for the National Small Business Association (NSBA), a Washington, D.C.-based advocate for small businesses. “With business lending drying up, small business owners are going to increasingly turn to their credit cards. It’s important that this vital capital avenue be regulated with some sensibility.”

The bill must still go before the Senate, but with a new Congress convening in January, it is unlikely to be passed before then unless it’s added to the proposed second stimulus bill, Kempf says. If that doesn’t happen, Congress will have to start all over again next year.

Of particular concern to the NSBA and other organizations is the card issuer practice of raising interest rates retroactively. According to the NSBA, 12 percent of small business owners carry a balance of $25,000 or more and 38 percent carry a balance of more than $10,000. One such business owner is 35-year-old Akili Cooper.

Cooper opened The Remedy for Living, a home furnishings boutique in Bowie, Maryland, with his wife Princess Mhoon-Cooper. The couple used credit cards to help launch the store in 2007 and have at times had an outstanding balance of $25,000. A rate increase would be devastating to the bottom line, says Cooper, since it would not only be more costly overall, but it would raise the minimum amount due at a time.

Under the legislation, card issuers would not be able to raise interest rates unless a promotional rate expires,

an index that the rate is based on changes, or if a minimum payment on an existing balance is more than 30 days late. Card issuers would also have to provide written notice of a rate increase at least 45 days before the change goes into effect. Business owners who depend upon credit would be better able to control their finances without the fear of a sudden payment increase looming, Kempf says. “Having $25,000 [with an interest rate of] 10% go to $25,000 at 30% is significant. It makes it difficult to have a sound business plan.”

The bill’s passage could also help offset another recent practice by the credit card industry that has hurt small businesses. With the credit market tightening, some cardholders have begun reducing the credit limits of customers who they perceive to be at risk of default. “If your credit

limit is $10,000 on a small business account and they cut your credit limit in half, what do you do?” says Bill Hardekopf, founder of LowCards.com, a Birmingham, Alabama-based company that tracks credit card rates and practices. “You might need that extra $5,000 that they cut to order inventory or pay your bills while you wait for your cash flow to come in. It can have a devastating effect.”

Kempf is confident that the legislation will pass, either this year or after being re-introduced next year, particularly in light of the current state of the economy. “Small businesses are the only part of the economy that is still actually creating jobs unlike everyone else who is shedding them,” he says. The House passed the bill 312-112.