What happens to your retail credit card when a store closes
Retail credit cards can be of great value to loyal buyers.
But many old retail giants have been replaced by digital stores, and economic uncertainty has left the future of many small businesses in limbo.
If you have a retail credit card with a store that is in financial difficulty, you may feel the impact when the retailer experiences closures or has 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 closings don’t often mean your favorite retailer disappears overnight. A retailer can only close their physical locations and move all online activity, in which case you should still be able to use your card as usual. Or a store may close only certain stores or a single brand within a family.
If a retailer closes all stores, your card account may also close, but if some stores or sister brand stores remain open, your card account may still be valid.
In the event of bankruptcy, the details may also vary. Sometimes stores that file for bankruptcy keep their doors open in hopes of making a recovery. If so, your card will still be usable. However, keeping a card with a company in bankruptcy proceedings is a slippery slope. The retailer may bounce back, allowing you to continue using your card as you always have, or it may fail, canceling accounts and leaving you without access to a credit card.
If you have a balance on the card
You will still be responsible for paying off your balance, even if a retailer files for bankruptcy. Typically, retail credit cards are issued by a finance company separate from the store itself, which means any debt you owe is held by the bank, not the store. This is true even for “closed loop” cards which are only valid with specific retailers.
If a store goes bankrupt, the balance you owe is still owed to the finance company that manages your card. You should receive a communication from the finance company telling you where to send the payments. You will continue to receive monthly statements and can continue to make regular payments until the balance is fully paid off.
Interest and fees will also continue to apply to your balance, so it’s important to pay off your debt as quickly as possible to avoid accumulating high interest payments.
If your retailer manages their own credit properties (which is less common), you will still be responsible for paying the balance. The debt will likely be sold and you will receive repayment instructions from the company that owns the debt.
If you have unused rewards
Contact your retailer before stores close to find out how much time you have to redeem your unused rewards. Any rewards you have accumulated will likely be invalid once your account is closed.
Depending on the details of the closing, you may be offered to transfer or other redemption options; for example, if your retailer has sister stores that will remain open, they can honor the awards. Likewise, if a store is simply closing physical locations and moving online, you should still be able to use your rewards online.
What happens to your card?
Your retail card issuer may offer you different options after the store is closed.
If the retailer has sister stores that will remain open, you may be able to continue using your card there. Alternatively, you may receive a product change for another credit card from the issuer. Or your account could just be closed completely.
You don’t have to accept alternative offers to closing an account, but they can be useful if your retail credit card was your primary credit card. If you have other cards that you use often, you may decide to just let your account go.
Impact on credit rating
Whether you choose to cancel your retail credit card or the issuer cancels your account, you will likely see a drop in your credit score.
The main factors at play here are credit history and credit usage.
If your retail card was one of your oldest credit cards, it can affect your average credit history. You will end your positive credit history with the account upon closure, but even closed account activity stays on your report for up to ten years, so you have time to see the impact. In the meantime, keep building your credit history and making payments on time.
If your retail card was your only credit card, it’s a good idea to research other credit card offers to replace it so you can continue to develop good credit habits. Remember that each time you apply for new credit, the creditor will do a thorough investigation of your credit report to check your creditworthiness, which may temporarily affect your credit score.
Using your credit has more of an impact than your credit history. Credit Usage shows how much credit you are using versus how much you have available. When you close an account, you will no longer have access to this portion of your available credit.
Let’s say your total available credit is $ 8,000 and your retail credit card limit is $ 1,500 of that amount. Once the card is closed, you only have $ 6,500 in credit available. Recommended credit usage is 30% or less of your total credit. If your available credit is $ 8,000, that gives you $ 2,400 to play. However, lowering it to $ 6,500 reduces your recommended usage to $ 1,950. Keeping your credit usage below the recommended 30 percent will be crucial in maintaining your healthy credit score.
One last factor that can come into play has the most impact on your overall score: payment history. If you have a balance left in the account, it is very important that you continue to make payments in full and on time until that balance is paid off in order to limit the negative impact on your credit score.
How to reduce the impact on your credit score
The best way to reduce an impact on your credit score is to maintain good credit habits, such as timely full payments and low usage on each of your accounts. A sustained history of responsible credit use is the best way to boost your score, and a single closed account shouldn’t be too damaging.
If possible, it may also be a good idea to keep your retail account open or accept a product change if the option is available, even if you don’t plan to use it as much. This will keep your credit history intact for your account, which can be especially useful for a long standing account.
But if you choose to cancel the account, maintaining good credit habits with other cards will help your score improve and stay in good standing for the long term.
At the end of the line
Retail credit cards are often more accessible than other personal cards, making them popular choices for building credit and can offer great benefits for frequent buyers. However, you can still feel long term effects if the retailer goes out of business, making this retail card a possible financial risk.
If you are considering applying for a retail credit card, look for established retailers that you already shop often with. Make sure the card benefits outweigh the fees, and redeem your rewards regularly instead of storing them. Since retail credit card interest rates can be even higher than standard credit cards, it’s also important to pay off your balances each month to avoid accumulating debt.