As more small-business owners turn to credit cards to make ends amid tightening bank credit, a bill that sought to provide relief through credit card reform has stalled in Congress.
The House of Representatives on Sept. 23, by a vote of 312-112, approved passage of a bill that would reform the practices of the credit card industry, including requiring advance notice of interest rate hikes. However, the Senate before adjourning for the campaign season spent all its time on the economic bail out bill and took no action on credit card reform.
No one knows for sure when, and if, the Senate will take up the matter.
“We will keep it alive. We’ll certainly be pounding on it and we’ll see how the Congress responds,” vowed Grafton H. “Cap” Willey IV, immediate past chairman of the National Small Business Association (NSBA), an organization pushing for credit card reform. He also is chairman of the Rhode Island chapter of the Smaller Business Association of New England (SBANE) and director of the Rhode Island offices of Tofias PC, an accounting and consulting firm.
The House and Senate bills would, among other things, also: ban “universal default,” where a credit card company raises the interest rate on one card if a card-holder misses payment on another; shield card-holders from misleading terms, tricks and traps that incur rate hikes and higher fees; and protect vulnerable consumers from fee-heavy subprime cards.
Willey suggested that a Democratic president and a Democratic Congress might be the answer because, he said, “they tend to be a little more consumer-oriented.”
“The chances for passage anytime soon, I don’t see how that is going to happen,” said Chip Unruh, press secretary for Sen. Jack Reed. It is possible that the Senate could return to session after the November election, but there is no guarantee that credit card reform will be on its agenda, according to Unruh.
Such a prognosis does little for the many business owners like Christine Cunneen, founder and operator of Hire Image LLC in Johnston, who have turned to credit cards to cover short-term expenses. Although she owned the building and it was insured, a fire forced her business out of its Johnston location in January. She’s been working since then out of a temporary office on Charles Street in North Providence.
When Providence Business News first spoke to Cunneen in June, she said she had turned to a line of credit to cover expenses as she awaited reimbursement for fire-related expenses from the insurance company. She is still waiting for the insurance money, her line of credit has been cut back and her credit card fees are on the rise.
According to a recently released survey conducted by the NSBA, 67 percent of the small- business owners questioned in August said their businesses have been affected by the credit crunch, an increase of 12 percent since the last survey in February. Asked if credit card terms have worsened over the last five years, 63 percent of the respondents said they have, a 6- percent increase since February.
“Sources of financing for NSBA’s members in the August survey included traditional bank loans, earnings of the business, and credit cards,” the survey reported. “Unfortunately, business owners report worsening terms for both bank loans and credit cards.” The NSBA noted that the August survey was conducted with a target sample of NSBA member businesses that are “older, larger and more established” than those polled earlier in the year.
The NSBA survey in February reported that 44 percent of small-business owners identified credit cards as a source of financing they had used in the previous 12 months, compared to only 16 percent in 1993.
According to another survey released in October, the Fall 2008 American Express OPEN Small Business Monitor, 52 percent of the business owners in the Northeast expect to face cash flow issues in the next six months.
To improve cash flow, the survey said, Northeast entrepreneurs will: use personal or private funds (29 percent); put off purchases (19 percent); obtain and use a line of credit (15 percent); use credit cards (9 percent); lease rather than purchase equipment (6 percent). Nationwide, the survey notes, 11 percent of business owners will use credit cards, with the highest rate (23 percent) in the manufacturing sector.
Cunneen still expects to return her business back to its original home on Alcazar Avenue in Johnston by the end of the year. Meanwhile, she is using credit as “a safety net” to pay for most expenses, she said, particularly extra expenses resulting from the fire, such as her mortgage on the burned-out building and rent on her current space.
Her home equity line of credit has been reduced by $75,000, “a big chunk of my safety net,” she said, while finance charges and the interest rate on her credit card have risen. “I used to pay my [monthly credit card] bills in full. I always paid it off,” she said. “For the first time, I have to carry balances.”
Cunneen is not, however, letting the credit crunch ruin her business or her attitude. She has hired two more full-time employees and one part-time worker for Hire Image LLC. “We’re not going to just sit down and be defeated,” she said.
According to its Web site, the NSBA had hoped that the Congress would include credit card reform in the economic bail out bill. The NSBA urged members to ask their senators to include it in the financial rescue package, even offering a sample letter that a business owner could amend or send as is to lawmakers.
“I am asking that Congress ensure that the terms of my credit card are understandable, predictable, and stable,” the letter states. “How can I plan or grow my business when I never know what to expect from my source of business capital?”
The credit crunch has been a “real burden” on small businesses, Willey said. “People are getting squeezed and a lot of businesses have resorted to credit cards.” He does not necessarily see anything wrong with a business using a credit card to meet short-term expenses or as a stop-gap measure. “The problem arises when you can’t pay it back,” he said, “and then you have higher interest rates.” •
