Dear Your Business Credit,
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I ran a business, but it folded. My credit card issuer said I was responsible for the card balance at a new rate of 26.95 percent. Is this correct?
I am sorry to hear that you still have to cope with debt from your business after it has closed. Many business owners find themselves in a similar situation, and it can be very burdensome.
You didn't mention whether this is a consumer credit card or a small business card. Even if it is a business card, you're still most likely personally responsible for the debt. When I ran your situation past Michael Jeffrey Gunderson, a bankruptcy attorney with Gunderson & Tharp in Chicago, he pointed out that the vast majority of business credit cards obtained by individuals through traditional retail banks require personal guarantees.
"The fact that it's a 'business' credit card is almost a misnomer in that it's the person's personal credit report and the person's personal guarantee that back up the card," he explained in an email. "It's likely in this case that the membership agreement provided a clause like this, and almost certainly there is a personal guarantee. Any credit obtained in a similar manner to a personal card (online, mail-in application, phone application, etc.) even if labeled a business card, is going to be personally guaranteed."
When you personally guarantee a debt, you are legally responsible for it.
As to whether your card issuer can raise your interest rate to 26.95 percent, that depends. According to the Consumer Financial Protection Bureau (CFPB), there is no federal law placing a ceiling on the interest rate that credit card issuers can charge. Generally, that's a decision made by the state where the card issuer has its headquarters. You can check with the consumer protection agency for that state to find out what the law is.
Your payment history on this account is also a factor in whether your card issuer can hike your bill suddenly. If you have fallen behind, your card issuer may be within its rights.
In May 2009, President Obama signed the Credit CARD Act, aimed at protecting consumers from abuses such as sudden interest rate hikes on existing balances if a payment is one day late. Card issuers can now only increase the interest rate on existing balances if you have been at least 60 days tardy in making a minimum payment -- unless there's an exception that applies.
One major exception is variable rate accounts, whose rates are tied to an index -- almost always the prime rate. That encompasses most cards these days. When the Federal Reserve raises interest rates, those increases are passed on to variable rate cardholders.
It's also important to note that many issuers don't give small business cards the same protections as consumer cards under the CARD Act, since they are not required by law to do so. It's very possible that your issuer was allowed, under the terms you signed, to increase your interest rate. Check your card's terms and conditions to see.
If you think your card issuer acted incorrectly in raising your rate, you can submit a complaint with the CFPB.
Finding a way to make more than the minimum payment can also help you greatly reduce the interest you pay on the debt in the long run. You can use the CreditCards.com debt payoff calculator to figure out how much increasing your payments will help you.
Obviously, it is not easy to pay off debts when your business has just closed, especially if it was your sole source of income. Looking for creative ways to raise money -- whether by selling a second car you seldom drive, working two jobs for a while or starting a new business that will generate quick income without a lot of overhead -- can make a real difference in your situation. There is a lot you can do to turn things around.
Just as starting your business took a big commitment, so does paying down the leftover debt. While that's not much fun, view it as an investment in building the strong credit rating you may need to get funding for your next business idea. Many entrepreneurs have learned from a past business failure and gone on to build a successful one. Protecting your credit score can go a long way toward landing on your feet.