Hidden Dangers of Business Credit Cards

NEW YORK (TheStreet) -- Small-business owners should take precautions when using a business-specific credit card. Understanding personal liabilities and avoiding monthly balances are crucial.

That's the theme emerging from a new report by CardHub.com, a credit-card comparison Web site.

The report examined policies at the 10 largest credit card issuers -- American Express, Bank of America, Capital One, JPMorgan Chase, Citigroup, Discover Financial, HSBC, USAA, U.S. Bancorp and Wells Fargo -- to see who was liable for small-business credit card use and how the cards were reported to major credit bureaus.

The report found that eight of 10 issuers hold the owner personally liable for use of the business credit card. (USAA doesn't offer a card, and information for Wells Fargo was unknown, according to CardHub.com.)

Six of the 10 make it a practice to report business credit card usage to their cardholder's major credit reports, the report found.

Odysseas Papadimitriou, CEO of CardHub.com, found the results alarming, considering there were new consumer protection laws implemented last year under the Obama Administration's Credit Card Accountability Responsibility and Disclosure Act of 2009.

The CARD Act was designed to increase protections for consumers by making credit card terms more transparent and doing away with shoddy card practices, including excessive fees and frequent interest-rate hikes by some banks.

Small-business cards do not share the same requirements as consumer credit cards for transparency and protections, despite the fact that the owner's personal credit history is taken into account for determining lines of credit and they are held personally liable for the cards.

Small-business cards are "exactly consumer credit cards," according to Papdimitriou. "They're just calling them a different name."

"Don't get confused by this marketing campaign that the credit card companies have created by calling them business credit cards. Realize that you are held personally liable for these cards in the same way you are held liable for a personal credit card," he says.

Small-business cardholders tend to have little business credit or new businesses or companies where the owner is so closely tied to the business that it makes sense to credit card companies to look at the individual rather than the business, he says.

He suggests that business owners who carry revolving debt use their personal credit cards to obtain protections. Credit card companies can, in theory, can raise interest rates on business card balances without much notice.

"If you're not going to pay your balance in full every single month, use your personal credit card because you are not taking any risk by doing so and you're getting all the CARD Act protections," he says. "That volatility is something small-business owners cannot take."

These days, banks and credit card companies are looking to attract small-business owners, likely because of the fewer restrictions on the cards.

Yet experts say small-business cards offer plenty of business specific rewards as well as the chance to build business credit history.

Jeff Stibel, CEO of Dun & Bradsheet Credibility Corp., a provider of credit building and credibility services for small businesses looking to establish credit, says small firms should "absolutely" use business-specific cards.

For small businesses, a major reason for using business credit cards is to establish business credit and eventually move away from having to use personal assets and credit as a determinant of line of credit, Stibel says.

Small businesses should also be reporting any vendor credit agreements they have to give credence to their business credit histories.

"The more trade references and the more creditors you have, the better your credit scores will ultimately be. So it's incredibly important to use these cards," Stibel says.

Some card companies have voluntarily applied CARD Act aspects to their small-business cards.

American Express, for one, has applied some elements of the Credit CARD Act to its small-business customers, according to Rosa Alfonso-McGoldrick, vice president of American Express' corporate communications.

Among aspects the card company adopted were initiatives to improve clarity and transparency in the small-business cards: providing 45 days' notice for any card changes and allowing customers to opt out of pricing changes not prompted by late payments, she said.

American Express has also made changes to simplify a business owner's payment cycle.

Business credit cards provide owners with flexibility and tools to help them run their businesses, card companies say.

"Small-business owners should closely examine credit card offers before deciding the best path forward for their businesses," according to Laura Rossi, a spokeswoman for Ink from JPMorgan Chase, the bank's small-business line of credit cards. "The credit needs of small-business owners are very different than those of consumers, and we have strived to meet those needs through a number of features."

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