Advanta Pulls the Plug on 1 Million Customers – Lessons to be learned

By: Mr Credit Card

06/16/2009

Sometime during the middle of May 2009, Advanta Bank (who issues only business credit cards) informed their customers (or rather cardholders) that they will have have to stop using their card. Someone had to stop charging by the end of May, some were given until 10th June 2009.

This news simply shocked many Advanta credit card holders and it shocked me too. The reason for Advanta doing this is probably due to their losses on their credit card portfolio (rumored to be as high as 20%). But what really shocked me was that they decided just to simply shut down their customers. Couldn’t they have sold off their credit card portfolio to someone else? That was probably the ethical thing to do. Instead, many business owners are scrambling to replace their advanta credit cards and get another one with similar lines of credit.

But I thought that there are some lessons to be learned from this episode.

Do not just rely on one credit line for your business or working capital – Many business owners rely just on their business credit cards for their line of credit. This episode has shown that this can be a very risky strategy. Instead, one should also get a line of credit from your bank. Yes, it may be more expensive (ie higher rates). But having a diversified source of credit lines is very important.

Have enough emergency cash – Yes, this sounds like personal finance advice. But it applies to a business as well. In fact, in the bond market, cash flow and cash on hand and two extremely important factors in evaluating the credit worthiness of a bond issuer. The more emergency cash on hand you have, the more stable you are and things like that will not derail your business.

Have a few business credit cards – Well, you shouldn’t just have business credit cards as your sole source of credit. You should also not just have one card. Get an Amex, a Discover Card and/or a Visa or MasterCard. That way, when one card pulls (like Advanta did), you have other cards as backup.

Some suppliers do not accept Amex. Some do not accept Discover (though most accept Visa or MasterCard). So make sure you have a few of them.

Business Credit Cards Are No Different from Personal Credit Cards – Yes, you’ve heard me. There is no difference between a “small business credit card” issued by the top credit card issuers and their personal credit cards. The reason is because both require the personal guarantee of the applicant (in this case the business owner). So if you fail to make payments on your business credit card, then your personal credit suffers!

Some business credit cards may not report to the three personal credit bureaus, but will do so if you are late!

The only cards which do not require personal guarantee are corporate cards. Corporate cards are only issued to businesses who are of a certain size, like 8 or 9 figure sales and lots of employees. Hence, unless you are the owner of a decent size business, corporate cards are out of the question.

Use Your Rewards Quickly – In todays’ environment, you never know what credit card companies can do. If they simply freeze your card for any reason, you could loose all of your rewards. So as a matter of policy, watch your rewards and use them while you can. Use them as soon as you can redeem them for rewards that you want.

Establish a business credit history – This topic can consume a whole blog itself. But if you have a business, take the necessary steps to establish a business credit history. At the most basic level, this involves establishing your business checking account, registering with Dun & Bradstreet, taking out a couple of small loans from folks who report to the business credit bureaus.

A solid business credit history will make it easier to get loans and working capital lines of credit.

It may be better to get a personal card – The latest credit card bill of rights does not (IMO) apply to business credit cards. Hence most of the protection offered in the bill may not apply to business credit cards. Lately, credit card issuers have been much more stringent about business credit cards because it appears that folks are paying off their personal cards but missing payments on their business cards when things are tight. All these plus the fact that your personal credit is on the line suggests to me that you are better off getting a personal credit card and using it for your business.

I would appreciate any thoughts from all of you.

Advanta Pulls the Plug on 1 Million Customers – Lessons to be learned

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