When a store leaves town — a scene that has played out thousands of times in recent years — it doesn’t take your store credit card debt along with it, even if the retailer closes all its locations.
“If the consumer has a balance on the card, they still would owe it to the issuer,” said Chi Chi Wu, a lawyer for the National Consumer Law Center who specializes in consumer credit issues.
When you own a store-branded credit card that works only at that specific retailer, it doesn’t mean the store itself offered you financing.
These type of “closed-loop” credit cards are still underwritten by a bank, which means your debt is owned by the bank and not the store itself.
So if that mall anchor closes, the bank still will be seeking to collect on what you owe. If the thought of your favorite store closing makes you nervous, consider opening a cash-back credit card instead.
Here are some common questions to consider if your go-to store goes under.
Q What happens to my credit card?
A It depends. There are three possible scenarios when the retailer associated with your card closes its brick-and-mortar locations:
l The account gets closed.
l The card can still be used for online or other purchases within that brand.
l The issuer will assign your line of credit to another retailer.
“All of that comes with notification, and as the consumer it gives you time to make a decision if you want to stay on for the ride,” said Bruce McClary, vice president of public relations and external affairs for the National Foundation for Credit Counseling.
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If you’re not interested in online shopping or making the switch to another retailer, you can opt to close the account.
Closing the account doesn’t erase it from your credit history, though. If your card is closed because a retailer goes out of business — or due to your own inactivity — it will still appear on your credit report.
Q If the issuer closes my card, will it affect my credit score?
A Yes. Even if you didn’t choose to close the account, it will still have an impact.
If you held the card for a long time, it can affect the average length of credit history, which is a factor in determining your score.
And depending on the number of cards you hold and the debt on each one, closing your store card can have a big impact on your credit utilization rate.
Let’s say you had a credit limit of $1,000 on your store card and $1,000 on a general purpose credit card. If you had no balance on the store card and a $500 balance on the other, you’d owe $500 out a limit of $2,000, giving you a utilization ratio of 25 percent.
Take away that store card and you’d now owe $500 out of a $1,000 limit, making your ratio to 50 percent.
Credit use counts toward about one-third of your overall credit score — so a big use jump can knock your score down.
If the issuer closes your account, get a copy of your credit report to make sure it’s reported as “closed” or “closed at lender’s request.” When the issuer closes the card, it has a smaller impact on your credit score than if you close the account yourself.
Q What if I stop paying my balance?
A As with any bill, there are consequences for not paying the balance you owe.
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“You remain responsible for paying the debt. Any late payments or failure to pay would affect your credit scores just as any other debt you owe,” said Rod Griffin, direct of public education for the credit bureau Experian.
Aside from the effect on your credit score, you’d still be subject to the same bill collection process as with other debts.
Q What happens to my rewards?
A If the store disappears, so do any credit card rewards you’ve earned. When you hear a retailer is closing, make sure to call the issuer right away to find out how long you have to redeem rewards.
Q The store near me closed, but the company isn’t out of business. Should I close the card?
A After a store closes, it’s possible your retailer will no longer be conveniently located.
When you choose to close a credit card account, it can have a negative effect on your credit score. If you can no longer visit a physical store, you still may want to keep the account open and shop online.
Q What if my card gets sold?
A In the rare instance that the issuer sells your credit card, you’ll see changes on your credit report, but it won’t impact your obligation to repay.
“If the account is sold or transferred to another company, two things would likely happen in your credit report,” Griffin said. “First, the original debt would probably be updated to show ‘closed’ and that it has been sold or transferred to the new company. Second, the debt would appear under the new company’s name, usually with a notation specifying from whom it was purchased or transferred.”
Q Is it smart to open a store card?
A It depends. Do you pay your bill in full every month? Does holding this card give you access to deals and sales that you can’t get with another card?
Only if you answered yes to both questions should you consider it.
The average store credit card interest rate is typically much higher than a standard card rate. So although you may get free shipping or a discount on purchases with a store card, if you end up paying interest charges, the finance charges are likely to be higher than the value of the card’s perks.
You may want to consider a low-interest credit card or a rewards credit card instead.