04/20/2011 01:40 pm ET Updated Jun 20, 2011

Why Credit Card Branding Is Costing Small Business Owners

So, what's the difference between business credit cards and regular consumer credit cards? This might at first seem like a stupid question, but think about it and try to come up with the answer. Is it that a business credit card is opened under a corporation's name and used only for business spending while anyone can get a consumer credit card and use it for anything? Is it that an individual is held liable for the misuse of a consumer credit card while a business credit card shields both a small business owner and his employees from personal liability? Perhaps the difference simply lies in how each type of card is reported to the major credit bureaus.

According to a study by, however, none of these seemingly-plausible reasons actually hold water. Business and consumer credit cards are actually more similar than they are different, the study says, a contention which therefore begs the question, should the Credit CARD Act of 2009 apply to business credit cards?

In order to truly answer this question, we must take a closer look at the law itself. As it turns out, Congress made a distinction between the two card segments, structuring the CARD Act so that it applies to "open-ended consumer agreements" and directing the Federal Reserve Board of Governors to study the law's future applicability to the business credit card market. In case you're wondering, an open-ended consumer agreement is legally defined as credit extended to a natural person for the purpose of making personal, family or household-related transactions. Thus, it's pretty clear that the protections enumerated in the CARD Act do not apply to business credit cards, right? Wrong.

According to the Card Hub study, every major business credit card issuer holds the individual who opens such a card liable for use in addition to the small business he represents. Six of the 10 largest issuers in the U.S. also report usage information to the individual cardholder's credit reports (Wells Fargo, HSBC, and U.S. Bank refused to be transparent about their practices, so this number might actually be even higher). And any prospective business credit card user must provide personal financial information on his application.

It's therefore obvious that credit is extended to a natural person, and since a small business owner uses his credit card to provide for his family and earn a living, it would seem that so-called business credit cards qualify as open-ended consumer agreements under the language of the law and should therefore be extended protection under the CARD Act. Either that or personal credit cards should not receive these protections when used for business spending.

Ultimately, the answer to the original question about the nature of the difference between business and consumer credit cards therefore seems to be branding. There is no fundamental difference between the two. Eligibility for both is based on an individual's credit history and income; both can be used to make the same types of purchases; both have individual liability; both relay information to an individual's credit reports. One simply has the label "business" attached to its name and the other does not.

As a result, the Fed must remove the wool from before its eyes, forget about labels and apply the CARD Act with some sort of consistency. In order words, either all consumer-based credit cards receive its protections, or none do; either every card used for business spending is exempt, or none are. Until this happens, small business owners can simply exploit the imbalance of the law's application by using personal credit cards to fund any business purchases that will not be paid for in full by the end of the month.

Odysseas Papadimitriou is the founder of Card Hub, a website that helps consumers and small business owners find the best credit card deals.