Business Credit Cards Could Jeopardize Your Personal Credit Rating: Study

May 18, 2011— -- Users of business credit cards are increasingly being subjected to potentially deceptive and harmful practices by card issuers, according to a study by the Pew Charitable Trusts.

"The high volume of offers that are going out to U.S. households is placing people at risk, whether you are an individual employee who is trying to track your work-related expenses or whether you're a small business owner who is taking out an account for yourself and your employees," said Pew's Nick Bourke, director of Pew's Safe Credit Cards Project, in a statement. "You're going to be personally liable for those expenses if you get a business credit card."

The non-profit consumer organization took a look at credit card issuers' practice of direct mail solicitation for business credit cards, which may come labeled for corporate, small business, or professional use.

Offers for business credit cards have skyrocketed after new protections went into effect in 2009 to protect consumer credit card users. The Credit Card Accountability Responsibility and Disclosure Act (CARD for short) mandated consumer protections to combat harmful, unfair and deceptive practices. Pew researchers say the CARD Act does not extend to business credit cards, leaving many households at risk.

"Credit card issuers have the opportunity to make more money and to be unencumbered by rules," Ruth Susswein, a deputy director at Consumer Action told ABCNews.com.

"The credit card issuers very much enjoyed not being hemmed in in any way prior to the CARD Act, and now there are some limitations on how much they can charge consumers," said Susswein.

Consumers targeted for business credit card may be unaware of a card issuers' ability to change account terms in the first year, charge penalty fees for existing balances and hold an individual liable for money owed.

To help consumers understand their financial responsibilities, Bourke says "credit card protections should be extended whenever there is a personal liability."

In the first quarter of 2010, credit card solicitations were up 29 percent compared to the same period last year, according to Synovate Mail Monitor. To lure new credit card holders an estimated 43.9 million pieces of direct mail are sent each month to households for business credit cards.

In the study by Pew, titled "U.S. Households at Risk from Business Credit Cards," researchers analyzed data provided by credit card issuers during the application process. Here's what Pew discovered:

Business Cards vs. Personal Credit Cards

Changes to Account Terms:

Business Cards: 80 percent of business cards allow credit card companies to change the terms of an account at any time.

Cards Protected by CARD ACT: Credit card companies cannot change the terms of an account the first year of issuance. The following year, credit card providers must give 45 days' notice to consumers and individuals may generally opt out.

The Winner: Cards Protected by CARD

Penalty Interest Rate:

Business Cards: Card holders can be hit with penalty interest rates any time for an indefinite period of time.

Cards Protected by Card: Penalty interest rates may not be applied to existing accounts unless 60 days past due.

The Winner: Cards Protected by CARD

Penalty Fees:

Business Cards: Unrestricted penalty fees. 73 percent of business cards included a late fee and 67 percent of business cards included an over-limit fee.

Cards Protected by CARD ACT: Consumers must opt in to over limit fees, and penalties are required to be "reasonable and proportional." The CARD act makes it unlawful to charge a penalty that exceeds the cost of a violation. For example, an over-limit fee for purchasing cup of $3 cup of Joe cannot exceed $3.

Application of Payments:

Business Cards: Credit card companies can direct payments to low-rate balances while interest rates accrue on higher rate balances.

Cards Protected by CARD ACT: Issuers are required to apply any balance above the minimum payment to the highest-rate balance first to reduce interest charges to cardholders.

The Winner: Cards Protected by CARD

Price Data:

Business Credit Cards: The lowest annual percentage rate advertised is 13.24 percent and the highest is 18.12. Some 41 percent of cards have an annual fee, but half offer a one-year promotional fee waiver. The median price tag for annual fees is $67.

Cards Protected by CARD ACT: The lowest advertised rate is 12.99 and the highest advertised rate is 20.99. Fourteen percent of cards have an annual fee. The median price tag of annual fees is $59.The Winner: Draw