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Posted: 2:51 p.m. Monday, Sept. 15, 2014

Why Entrepreneurs Should Avoid Business Credit Cards



By Clark Howard

ClarkHoward.com


What's the difference between personal credit cards and small business credit cards? One can decimate the revenue of small businesses, while the other offers a great workaround and protections for entrepreneurs.

Politicians pay a lot of lip service to small business, but they really stab this economic engine in the back with their actions; everything they do is for the big guys who line their pockets. An example of this is a loophole in the Credit Card Accountability Responsibility and Disclosure (CARD) Act that offers some great protections for individuals, but leaves small businesses high and dry.

Here's why business credit cards are a raw deal for small businesses

Perhaps you've heard that the interest rate can't be raised on existing balances under the much ballyhooed new rules? Well, that rule only applies to personal credit cards. Small businesses have been exempted from this protection and others, leaving them exposed to retroactive rate increases, shorter billing cycles and more.

In fact, small business credit card interest rates went up six times faster than interest rates on consumer cards immediately after the CARD Act went into effect back in 2010.

But, wait there's more! There's also a second level of liability specific to small business cards. When you use one of these cards, the lender can do what's called "piercing the corporate veil." In plain English, that means if your business can't pay the bill, the bank comes after you personally.

And what happens when you lose a business card or it gets stolen? The liability of a small business can be unlimited under current law. Contrast that to the fact that an individual's liability on a stolen or lost personal card is capped at a maximum of $50.

No matter how you slice it, business cards absolutely stink for small businesses! So I have a simple workaround strategy: Use personal credit cards for your business. You can pay the bill out of your business funds, but don't actually use any business cards. This is a surefire way to protect yourself.

Meanwhile, if you're looking for a new credit card, check out this list of my 5 favorite credit cards.

Finally, if you have a small side business where you work with customers out in the field, there are new ways for you to take credit card payments anywhere you go.

A special note for Home Depot's small business customers

Following news of the recent breach, now comes word that Home Depot gets 40% of its sales from contractors and other small businesses. That presents a wrinkle I didn't at first think of: Small businesses are at greater risk when their business card is compromised.

As I outlined above, federal law does not provide the same protection for small businesses that it does for individuals. So if you shopped there as a contractor, you want to monitor your accounts anywhere from daily to weekly for the forseesable future and watch for bogus charges.

I would even recommend you be proactive and go one step further by freezing your personal credit files. It's not yet clear what info the crooks gathered from the Home Depot breach. But you don't want someone opening new lines of credit in your name...and that's exactly what a credit freeze will prevent. (It won't stop you from using your existing credit cards.)

As I've said before, this not Home Depot's fault; it's the underlying architecture of our banking system that is at fault.