New Fed restrictions are expected to take effect in October 2011, at the earliest. (Thinkstock)

The Great Recession occurred largely as a result of unsafe lending practices that allowed consumers to exceed their means and drag the nation’s economy down with their personal finances. The extent to which this occurred could have perhaps been decreased if more proactive federal regulation had taken place.

It appears as if the Federal Reserve learned its lesson from the national financial swoon as it recently announced regulations that serve to close loopholes within the new credit card law (CARD Act) before they cause significant damage. Such a move comes in refreshingly severe contrast to the laissez fair-type policy practiced by the Fed for the last decade and seems to be a positive sign for the financial well being of the United States.

CARD Act background

The CARD Act — which took full effect in August — instituted numerous consumer protections designed to curb the predatory, harmful credit practices that were previously allowed to perpetrate unchecked and helped lead to the nation’s financial malaise. While this is the most sweeping piece of credit card legislation passed in years, sometimes vague language has allowed certain unscrupulous credit card companies to continue dangerous practices.

APR change protections

Prior to the Fed regulations, the CARD Act stated that issuers could not change a consumer’s interest rate during the first year that an account was open or apply increased APRs to existing balances unless consumers were at least 60 days delinquent. Such rules even pertained to accounts with introductory rates. However, some companies evaded the spirit of the law by offering to waive consumers’ APRs for a certain period of time while retaining the self-conferred right to revoke the waiver at will. For example, instead of offering you a 0 percent APR credit card, they would give you a card with a 15 percent APR, that they would offer to waive for the first 12 months. Their rationale was that waiver revocation would not be an APR change rate but merely a re-instituting of a normal rate. However, the Fed restrictions — expected to take effect in October 2011, at the earliest — close the door on such fee waivers.

Fee limits

The CARD Act also prohibits credit card companies from charging more than 25 percent of a card’s limit in fees during the first year an account is open, a provision that affects bad credit credit cards most significantly. Certain companies found their way around this by charging processing fees that had to be paid before an account could be opened. These fees, according to issuer thinking, did not count toward the 25 percent limit because they were not assessed during the account’s first year. However, like the fee waivers, this semantic interpretation was nullified by the Fed’s decree.

Income Determination

The Fed also banned the use of household income as a determining factor of a consumer’s ability to pay, holding that personal income will provide a far more accurate indication of how much debt someone can afford comfortably. This distinction will help protect people from the widespread severe disparities that existed between amounts owed and means of payment prior to and during the recession.

These Fed changes will surely provide consumer aid upon taking effect, but their larger implication is what’s truly important. If the Federal Reserve continues to address issues before they become significant problems, the chances of facing another recession down the road will decrease significantly. This organization had not acted so swiftly in more than 10 years, so it appears as if a policy shift has taken place. However, once could be a fluke, but two or three make a trend, so pay close attention to how the Fed acts in the coming months. Its behavior could serve as an apt indicator of our economic future.

Liability considerations

It is a common belief that business credit cards confer some measure of financial liability protection to small business owners. The perception is that because these cards serve business purposes, any financial difficulties encountered while using them ultimately falls not on the owner as an individual, but on the business as a separate entity. This is not the case, however, because lenders make no distinction between a small business owner and his or her company. Unlike with larger businesses, small business liability is personal liability. Therefore, one advantage commonly attributed to small business credit cards is actually nonexistent. This fact becomes especially important when the effects of the new credit card law (CARD Act) are considered.

CARD Act implications

Among the many regulations instituted as part of the CARD Act are stipulations prohibiting lenders from applying increased interest rates to existing balances or implementing penalty APRs until a consumer is 60 days delinquent. While these changes do provide significant consumer benefit, they only apply to personal credit cards. Therefore, a bank can assess an arbitrarily increased interest rate on a balance held with a business credit card, thereby making a user’s credit card debt more costly. This fact makes use of such cards inherently risky for carrying debt, as it is a common practice for credit card companies to raise interest rates as a means of quickly increasing profits. Thus, a small business owner should employ a personal credit card for this type of spending because of the protection and stability it will provide.

Still, having a business credit card for smaller purchases that will be paid for in full each month is a good idea, as well.

Business card utilities

Business credit cards should be employed for all purchasing that does not expose one’s balance to vulnerability because such cards have certain features that make them apt for business use. More specifically, business credit cards provide better reporting that allows users to easily track and monitor business purchases as well as give cards with personalized limits to employees, which owners can then earn rewards on.

Recommendations

Personal and business credit cards have inherent perks and drawbacks. However, when used correctly in concert, they provide a net benefit to small business owners. A user must simply remember to fund any purchases that will lead to a balance with a personal credit card and all others with a business credit card. By doing so, this person will be able to manage his or her small business with the predictability and cash flow stability necessitated by the current state of the economy and precluded by unexpected cost-of-debt increases.