CARD Act Forces Small Businesses to Turn to Personal Credit Accounts

by Mercator Advisory Group 0

Professor Scott Shane of Case Western Reserve University posits that small businesses are turning away from business credit cards to personal credit card accounts in part due to the CARD Act.

From the Crain’s Cleveland blog:

But another factor behind the decline, Prof. Shane writes, “may be the CARD Act, which went into effect in February 2010 and has led small business owners to shift from business to consumer credit cards.”

The new law “protects consumers from some of the banks’ less-desirable credit card practices,” he writes. “In response to the new law, banks have reduced some fees, are much less likely to raise interest rates on accounts already in place, and have made credit card costs more understandable.”

There’s not yet good data on how much the CARD Act has affected small business borrowing, he writes, but its effect “could be substantive.”

Citing the drop in business loans under $1 million as evidence of the decline, he also cites a shift in card use documented in the ongoing NFIB survey series:

Moreover, Prof. Shane adds, a National Federation of Independent Business report “shows that the fraction of small business owners who use personal credit cards for business increased from 42 percent in 2009 to 49 percent in 2011, while the fraction who use business credit cards declined from 64 percent to 59 percent.”

It is worth noting that business lending statistics are notoriously murky, and that clean small business credit card lending statistics are not reported. The effects of the CARD Act are likewise difficult to document, as only about half of consumers were aware of the legislation and its benefits even during the height of its publicity, according to Mercator’s consumer surveys. Personal cards have always been an important lending source for small businesses, and business owners unable to qualify for new accounts under the industry’s tighter lending standards may have turned to this important borrowing alternative.

Click here to read more from Crain’s.

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