Craig Johnson, Clark.com
With the holiday season in full bloom, the large crowds at the malls and shopping centers might belie a fact of life about the retail industry at the moment: Stores are beset with tremendous challenges to their bottom line.
Sears, Kmart, Toys “R” Us — many of America’s most recognizable stores are closing stores in reaction to fast-moving changes in the marketplace. As someone who frequented these stores, you may have applied for and gotten a store credit card.
We’ve written earlier about how that is generally a bad idea (more on that later), but to illustrate our point and in light of the current retail climate, we thought it’d be a good idea to show you what happens to a store-branded credit card when the company shuts its doors.
Here’s what happens to your store-branded credit card when the store closes down
Let’s say your store is called Shopsville and you’ve got a shiny Shopsville-branded credit card. Well, if Shopsville announces mass store closures, perhaps affecting the only location in your area, you may be in a bit of a pickle. Here’s how that would typically work out:
Your card may still be useable online
First, we need to understand that just because a store opts to close its doors doesn’t automatically mean that its namesake credit card will be useless. As we well know, many brick-and-mortar businesses are shifting to digital-only stores, meaning that’s where their cards will continue to be used for transactions.
Your loyalty program will probably go away
One of the tools in the arsenal of retail stores is that they wait until you’re at the cash register to offer you a card, usually with a discount attached to your purchase and enrollment in some kind of rewards program. These deals the bait they use to lure you in as a customer. Once the store fails, those rewards and loyalty programs disappear as well.
You may get a new credit card — or not
In some cases, when the business goes bankrupt and closes, the card issuer may opt to convert the card to a generic one. There are cases where a major bank like Chase has issued a card with a retailer’s logo on it — let’s use Circuit City as an example — and because the store went under, the bank sent new cards out. Those new cards, of course, are attached to the same account that you had with the retailer, meaning that your outstanding balance will survive even though the store didn’t.
There are cases in which card holders will not be issued new cards. It just depends on the store, bank and situation.
You’re still on the hook for debt
If you think that the balance you owe on a store credit card will just vanish into thin air just because the store went belly-up, think again. The issuer of the credit card was never the store, but a bank, the underwriter of the loan. You’ll want to pay the card balance off as quickly as possible so as not to avoid any delinquency fees, which could ding your credit report.
Babs Ryan, the former head of card services for General Electric, said that it’s pretty rare for a credit card to be owned outright by a retail store. “They are owned by private label companies such as GE or Citibank,” she told CreditCards.com.
She added, “I worked for GE when Montgomery Ward closed and GE managed the card business,” she adds. “Almost always, the outstanding credit card balance is still outstanding, and the cardholders will still get bills. As a cardholder, you acquired the goods on the credit cards, and made an obligation to pay over time with interest, and you still have that obligation.”
Your card — and information — could be sold
Another thing that could occur is that the bank could choose to sell your card account to another retailer.
“If the account is sold or transferred to another company, two things would likely happen in your credit report,” Rod Griffin, director of public education for the credit bureau Experian, told the Associated Press. “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.”
Store credit cards: Why Clark says don’t do it
Money expert Clark Howard advises against carrying a store credit card. The average store credit card carries an interest rate of 25%, well above that of credit cards in general (16%). When they entice you to get a card with incentives like instant discounts, they’re banking that you won’t pay your balance off at the end of the month.
Clark says that not only are store credit cards inferior to other cards, but many of them employ a practice called deferred or retroactive interest. That means that if you fail to make a payment one month or don’t repay your balance within the stated 0% period (usually mentioned in very fine print), interest will be applied retroactively to the full purchase amount. Ouch!
“If you’re someone who carries a balance, retail cards aren’t for you,” said Matt Schulz, senior analyst at CreditCards.com. “Even with the rewards and discounts, the math just doesn’t work.”
Meanwhile, retailers are increasingly reliant on plastic to bolster sales. The store credit card for Macy’s, one of the nation’s stalwart department stores, accounted for about 40% of its $1.9 billion profit last year, according to the New York Times, citing numbers from Morgan Stanley. At Kohl’s, the figure was 35% — compared to just 3% at Amazon, the Times reports.