SO MUCH FOR for a helping hand on credit-card reform from the Federal Reserve.

When the Fed last year began an inquiry into small business credit-card use, some in the small business community hoped the study would lead to legislation upgrading protections for companies with 50 or fewer employees. Advocates wanted to win the same kinds of breaks granted consumers under the Credit Card Accountability Responsibility and Disclosure (CARD) Act. (That law, which bars credit-card issuers from such practices as hiking rates on past purchases, shifting payment dates or charging over-limit fees, doesn't apply to credit cards used primarily or exclusively for business purposes.) But a new study is sending a ripple of disappointment through the small-business world.

Although the Fed does suggest that small businesses would likely benefit from beefed-up credit-card protections, it stops short of recommending action. What’s more, the study’s authors indicate that restricting an issuer’s ability to adjust interest rates potentially could result in higher initial rates and further credit contractions for small-business owners. Chi Chi Wu, a staff attorney at the National Consumer Law Center, says that the Fed’s conclusions are just the standard excuse for banks, which always say that regulating credit leads to restricted lending. Gerri Detweiler, a small business credit adviser with educational web site Credit.com, adds that the study was incomplete, since it didn’t include businesses with no employees.

Concern stems from the fact that rates for small-business cards have risen disproportionately in the wake of the passage of the CARD Act. Three months after the law took effect, the interest rate on business cards across eight major credit-card issuers increased 8% on average, while the rates for consumers gained an average of just 1%, according to new study from BillShrink, a credit-card comparison web site. Going forward, such rate hikes will cause small businesses to fork over an additional $420 million in finance charges in 2010, says BillShrink.

Those charges will pinch -- and have already pinched -- owners like Casey Cobb, the founder of Academie Culinary Wines. Last year, Cobb had a credit score of 750 when two of his card issuers informed him that his interest rates would soon jump from 8.9% to 27.9%, and 14.9% to 27%. When the Concord, Calif., vintner, moved to pay off those cards rather than pay the higher interest rates, his credit score took a hit.

The higher rates have a variety of sources, says Samir Kothari, BillShrink's co-founder. "We’re seeing an increase in the amounts of money small businesses are putting on cards -- stoking the potential for increased risk from the card issuer’s point of view,” he says. It’s likely also possible that credit-card companies, which are expecting to lose billions of dollars in revenue as a result of the new law, are looking to small-business card holders to pick up the slack, he says.

Still, some issuers are independently taking steps toward improving the credit conditions for small businesses. In February, for instance, Capital One Financial (COF) said it would pass on to small-business cardholders terms such as providing a fair allocation of payments (where payments go to highest interest rate balances first); 45 days advance notice of changes in terms; and a fee cap of 25% of a cardholder’s credit line.

Meanwhile, banking industry groups are voicing support of the Fed study, saying that small-business cards should be treated differently than consumer cards. “Small-business cards present higher underwriting risk and greater cost in both maintaining the account and in overseeing its performance,” notes Ken Clayton, the senior vice president of card policy at the American Bankers Association, in a statement regarding the Fed report.

—Write to Diana Ransom at dransom@smartmoney.com

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