Retail store credit cards hold great value for loyal shoppers, but many once-major retailers have gone bankrupt in recent years. If you have a credit card for a store that is in financial difficulty, you may feel the impact when that retailer closes or is forced to file for bankruptcy. Here’s what you need to know about how your credit may be affected and what you can do to minimize the damage.
Types of store closures
Store closures don’t necessarily mean your favorite retailer will disappear overnight. Store closures can happen in a variety of ways, including:
- Physical location closures: A retailer may close only its brick-and-mortar stores and move all operations online, in which case cards can be used as normal, or a store may close only some of its locations or only one brand within its family.
- Single brand closure: If a retailer closes all of its stores, your card account may be closed as well. However, if some stores or sister stores of a brand (different brands operating under the same parent company) remain open, your card account may remain active.
- bankruptcy: Bankruptcy details vary. Sometimes the store that files for bankruptcy will stay open in the hopes of recovering, in which case your card will still be accepted. In some cases, the retailer will get back on its feet and you’ll be able to continue taking your card as before, but in other cases, the bankruptcy will cancel your account and you won’t be able to use your credit card.
What happens to your card?
When stores close, retail credit card issuers may offer you different options.
As mentioned above, if the retailer has a sister store that remains in business, you may be able to continue using your card, or you may be re-provisioned for a different credit card from that issuer, or your account may be closed entirely.
You are not obligated to accept the alternative of closing your account, but if your retail credit card was your primary credit card, it may be worth it. However, if you have other cards that you use frequently, you may want to just close the account.
If there is a balance on the card
Even if the retailer goes bankrupt, you’re still responsible for paying the balance. Generally, retail credit cards are issued by a different lender than the store, so whatever you owe is held by the bank, not the store. This is true even for “closed-loop” cards that are only valid at a specific retailer.
If the store goes out of business, you’ll still have an outstanding balance with the lender that manages your card. They’ll contact you with information on where to pay your bills. You’ll still receive monthly statements and can continue to make regular payments until your balance is paid in full.
Interest and fees will still apply to any balances, so it’s important to pay off your debt as quickly as possible to avoid high interest charges accumulating.
If the retailer manages its own credit assets (not common), you will still be responsible for paying the balance. The debt may be sold, and you will receive repayment instructions from the company that owns the debt.
If you have unused rewards
Please contact the retailer before the store closes to find out how long you have to redeem any unused rewards, as any rewards you have accumulated may be forfeited if your account is closed.
Depending on the details of the closure, you may be offered transfer or other redemption options. For example, if a retailer has sister stores that remain open, rewards may apply. Similarly, if a store closes its brick-and-mortar locations and moves online, rewards can still be used online.
Impact on credit scores
Even if you choose to cancel your retail credit card, your credit score may still be affected if the issuer cancels your account.
The main factors at play here are the length of your credit history and your credit utilization ratio. If your retail card is one of your oldest credit cards, it can affect the average age of your accounts, which accounts for 15 percent of your FICO score. Luckily, activity on closed accounts will remain on your reports for up to 10 years, so on-time payments will still work in your favor.
Even more influential than your credit history is your credit utilization ratio, which tells you how much of your credit you’ve used compared to how much you have available. When you close an account, you lose access to that portion of your available credit.
Let’s say your total available credit is $8,000, of which your retail credit card limit accounts for $1,500. If the card is closed, you’ll only have $6,500 available credit. The recommended credit utilization ratio is 30 percent or less of your total credit. If you have $8,000 available credit, you’ll have $2,400 available. However, if you lower this to $6,500, your recommended utilization ratio will drop to $1,950. Keeping your credit utilization ratio at or below the recommended 30 percent is important to keeping your credit score healthy.
To quickly check the current ratio, Bankrate’s Credit Utilization Calculator.
How to mitigate the impact on your credit score
The best way to mitigate the hit to your credit score is to maintain good credit habits, such as making payments on time and in full and keeping your utilization ratio low on each account. A consistent history of using credit responsibly is the best way to build your credit score, and closing one account won’t have much of a negative impact.
It’s also wise to keep retail accounts open if possible, or accept product modifications if the option is available, even if you don’t think you’ll use them much. This will keep your account’s credit history intact, which is especially helpful for long-term accounts.
But if you choose to close a credit card, maintaining good credit habits with your other cards can help improve your score and keep you in good standing in the long run.
Conclusion
Retail credit cards are a popular choice for building credit because they’re easier to access than other consumer cards. However, if a retailer goes bankrupt, there could be long-term consequences and your retail card could become a financial risk.
If you’re considering applying for a retail credit card, look for established retailers where you already shop frequently. Make sure the card’s benefits outweigh the fees, and redeem points regularly rather than hoarding them. Interest rates on retail credit cards can be even higher than standard credit cards, so it’s also important to pay off your balance each month to avoid building up debt.
