Is Your Creditor Going Under? Tips for Moving Forward

On our blog, we cover a myriad of topics related to credit cards, including how to:

When it comes to taking control of your credit, we’ve got you covered. But what happens when your creditor’s business is beyond your control? What happens when they go out of business?

If this is happening to you, you probably have a few questions. Keep these answers in mind as you move forward.

  • Can I still use my credit card?

It depends on the company. While big names like Visa and MasterCard own their credit portfolios (i.e., customer debt belongs to them), many retail store cards are underwritten by external banks. For example, the now-defunct electronics store, Circuit City, issued customer credit cards that were underwritten by Chase Bank. When Circuit City closed its doors for good, customer cards remained open because they were backed by Chase. Despite this fact, it’s obvious that Circuit City customers couldn’t take their store cards across the street to Best Buy. In this situation, Circuit City’s closure effectively terminated their customers’ lines of credit, preventing them from making future charges. Although accounts with balances remained open, customers could not use their cards.

On the other hand, some credit cards are linked to multiple businesses under the same company umbrella. For example, Old Navy, Gap, and Banana Republic all operate under the multinational corporation, Gap Inc. Hypothetically speaking, Old Navy customers wouldn’t lose their lines of credit if the company went out of business. Gap Inc. would likely offer to issue new cards for their other retailers, Gap or Banana Republic, and transfer customers’ existing balances from their Old Navy credit cards. Although the Old Navy card would become obsolete, customers’ lines of credit would still remain active, allowing them to charge future items.

The bottom line: There are multiple if/then scenarios to consider when your creditor goes out of business. Contact them directly to learn more about the fate of your existing credit card.

  • Will my debt be cancelled?

No. As we learned from Circuit City’s situation, a company out of business does not equal a company without credit. If you bought a television from Circuit City the month before their closing, your charge did not become an instant “freebie” once the doors closed. As the underwriter, Chase still held your debt and expected you to repay it. This same principle applies to companies without underwriters, i.e., those who own their credit portfolios. The company’s financial situation does not excuse or cancel your debts. If you charged it, keep paying for it.

  • Can I remove the account from my credit report?

It depends on the situation. Consider the following example:

Friends Carrie and Michael each held Circuit City credit cards. The week the company went under, Carrie had a zero balance and Michael still owed $1,300 on a computer he purchased. Carrie’s card was closed immediately because she had no debt. Michael continued to pay off his computer, and was finally able to close his card six months later.

Don’t let the company’s CLOSED sign fool you—it doesn’t immediately close your account as well. Although invalid credit cards are useless in a store setting, they carry the same weight, rewards, and penalties as valid cards. Paying off your debt means a reward on your credit report and a positive credit score; paying late or not at all means a negative citation and a lower credit score.

Once your account is closed (i.e., debt free and invalid) you have the right to remove it from your credit report. Until then, practice the same credit repair strategies you would use for any other line of credit. The company may be closed, but your credit card can still help or harm you. It’s your choice.