Credit Card Reform

Hindering both aspiring and thriving entrepreneurs, access to capital is a perennial concern for America’s small businesses, as they face unique challenges when obtaining financing. The credit crunch, bank consolidations, and changes in the lending market have only exacerbated the problem. In turn, many entrepreneurs have been forced to finance their start-up or growing firms with credit cards.  
 
In recent NSBA surveys, nearly half of small-business owners identified credit cards as a source of financing they had used in the previous 12 months—more than any other source, including business earnings. In 1993, only 16 percent of small-businesses owners identified credit cards as a source of funding they had used in the preceding 12 months.
 
NSBA data also shows that nearly three-quarters (71 percent) of the small-business owners who use credit cards as a source of funding are carrying a balance month-to-month. This is up from 64 percent in 2000. Twelve percent of small-business owners are carrying a balance of more than $25,000, and 38 percent are carrying a balance of more than $10,000.
 
Although they are increasingly turning to credit cards to finance their business ventures, more than two-thirds of surveyed small-business owners report that the terms of their cards are worsening. This is not good news for America’s economy, which is heavily reliant on a robust and thriving small-business community.
 
Small businesses comprise 99.7 percent of all U.S. employer firms and more than half of all private-sector employees. Over the last 20 years, they have generated 93.5 percent of all net, new U.S. jobs. The billions of dollars generated from outlandish retroactive interest rates hikes, the escalating imposition of undisclosed fees, and unilateral and unforeseen interest-rate increases is money diverted from economic development. A third of small- and mid-sized businesses say that they would hire additional employees if more capital were available to them.

America’s small-business owners are not in the habit of advocating the passage of increased federal regulations, preferring free enterprise and market solutions, but the current practices of the credit-card industry defy the principles of a free market.
 
One of the basic tenets of free-market capitalism is the sanctity and insolubility of contracts, but somehow the credit-card industry has managed to insulate itself from adherence to this principle, retaining the right to unilaterally change the conditions of their contracts at any time. For instance, the retroactive application of penalty interest rates effectively increases the purchase price of products and services for which consumers are already committed. This ex post facto application undermines business plans.
 
A free-market system also relies on actual competition, but there is no longer real competition in the credit-card industry. In 2004, the top 10 issuers controlled 88.1 percent of the market (understood as their proportion of outstanding credit-card debt) and by 2006, the top three card issuers alone controlled more than 61.8 percent.
 
Free market competition also is based on informed consumers, but the business practices of the credit-card industry appear geared more toward obfuscation than illumination. A recent Government Accountability Office report found that the required disclosures of credit cards “often were poorly organized, burying important information in text or scattering information about a single topic in numerous places. The design of the disclosures often made them hard to read, with large amounts of text in small, condensed typefaces and poor, ineffective headings to distinguish important topics from the surrounding text.”
 
Improved disclosure—which must not be construed as simply more disclosure—is of paramount importance to the small-business community. America’s small-business owners are capable of following the rules governing their credit cards but the rules must be clearly established, and they must be consistent and predictable.
 
Improved disclosure is not enough, however. America’s entrepreneurs are not naïve or uniformed consumers. They are accustomed to dealing with myriad complex financial and regulatory frameworks. The current rules governing the credit-card industry are simply stacked against them.
 
While welcoming the recent voluntary discontinuation of certain practices by individual card issuers, NSBA believes that stronger safeguards are necessary to help ensure that America’s small businesses can continue to serve as the engine of the U.S. economy. Accordingly, NSBA supports the following credit-card reforms:

1. Prohibit the practice of universal default,
2. Prohibit the practice of double-cycle billing,
3. Prohibit the retroactive application of interest rate hikes—interest rate increases only should be applied to future card usage,
4. Limit the interest rate percentage increases that card issuers can impose on holders,
5. Require card issuers to apply a customer’s payments to the card balance with the highest interest rate first,
6. Prohibit extra interest charges on card debt that the cardholder already paid in full,
7. Prohibit interest charges on transaction fees,
8. Prohibit late fees if an issuer’s action caused a delay in crediting a payment, and
9. Establish an industry-wide practice regarding the time on which a payment must be received or sent to be considered on time.
   
   The small-business community is not opposed to the credit-card industry. On the contrary, small businesses are increasingly reliant on credit cards for their very existence. To this end, Congress must remain vigilant that it does not inadvertently restrict the availability of essential credit-card capital to America’s small business
    
   While NSBA welcomes the overdue regulations recently approved by the Federal Reserve Board, the Office of Thrift Supervision at the U.S. Department of the Treasury, and the National Credit Union Administration, it is strongly urges Congress to codify them. Rules are more easily undermined than legislation and Congress must institute an effective date prior to the one currently stipulated: July 2010. It is unimaginable to allow credit-card industry to engage in practices so detrimental to consumers and small-business owners during such a period of grave economic uncertainly.
    
   If the U.S. economy is to recover, it will be through the efforts of America’s entrepreneurs. If small businesses are to start, flourish, and grow during the credit crunch and recession, they largely will be financed—at least initially—through credit cards. Congress must protect the engine of economic recovery: small-business.
   

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