What Does it Mean for Small Business Owners?

As credit card terms and regulations squeeze an estimated 27 million small businesses operating in the U.S., there's a lot of talk surrounding the Credit Card Accountability Responsibility and Disclosure Act of 2009, signed into law by President Barack Obama on May 19th.

Gloria's Story

You may be wondering what this new Act means for small business owners. Let's look at Gloria's story to consider the impact of the new credit card legislation.

Gloria runs a catering company and is among 59% of small business owners that rely on credit cards to help finance day-to-day operations. Due to the economic downturn, Gloria has struggled to maintain a healthy cash flow while she waits for overdue payments from clients. As a result she has relied more on credit to pay the bills and recently paid her credit card issuer two weeks late. Following her late payment, Gloria received notification that her interest rate would jump from 12.99 to 27.99%, beginning just fifteen days after the statement was sent.

Key Changes Outlined by Credit Card Legislation

When the new credit card legislation goes into motion nine months from now, business owners like Gloria will not find themselves in the same predicament. Some of the key changes outlined in the legislation include:

• Late payment grace period - Credit card holders will not be issued a penalty interest rate until they are 30 days late (and for some banks, 60 days) in making the minimum payment.
• Incentives for timely payments - Under the new legislation if Gloria works to make regular on-time payments for six months after the late payment, the interest rate must go back to the original lower rate.
• Longer notice period - The notice period for any significant changes in terms and conditions on credit cards will be extended from 15 to 45 days, allowing individuals like Gloria to take the necessary precautions to pay off their balances.
• Disclosures - Credit card issuers will be required to issue a disclosure of the period of time and total interest it will take to pay off the card balance if only minimum monthly payments are made.
• Statement mailing schedule - Banks must send out the bill no later than 21 days before the due date.
• Broader definition of "on time" payments - If the card company gets your payment by 5 p.m. on the due date, it's on time, according to the new rules.
• Age restrictions - No one under 21 can have a card unless a parent, legal guardian or spouse is the primary cardholder.

Small businesses were not explicitly included in the credit card reform legislation. Nevertheless, the bill will address some of the challenges faced by entrepreneurs like Gloria who use their personal credit cards for business purposes. For such entrepreneurs, who have come under financial strain with rising interest rates and decreasing credit card limits in the past six months, the legislation will tackle what many feel are unfair practices creating a disadvantage for small business owners nationwide.

In the interim, until these changes take place, small business owners should continue to proceed with caution while using credit cards to finance small business expenses.

Get more information about credit card management.

Read more on the new legislation:

• Faircloth, Kelly. ‘New Credit Card Regulations Good for Small Business?' Inc. 26 May 2009.

• Martin, Andrew. ‘A Credit-squeeze for Small Business Owners.' New York Times. June 2009.

• James, Frank. ‘Credit Card Legislation Becomes Law.' NPR News Blog. 22 May 2009.

• Lieber, Ron. ‘Consumers Are Dealt a New Hand in Credit Cards.' New York Times. 19 May 2009.

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