Did you know: What if my retailer has gone out of business?
One of the unfortunate side effects of the COVID-19 pandemic is the large number of retailers that have permanently closed their doors. If you’re a loyal patron of these stores then you’re going to have to search elsewhere for similar goods and services. And, if you have one of their store credit cards, there are likely to be repercussions to your credit reports and possibly your credit scores.
Retailers are rarely their own issuing credit card bank. Meaning, just because you have a credit card with a retail store’s logo and color scheme, it’s unlikely the retail chain is actually the credit card issuer. Most retailers forge partnerships with credit card issuers who will then issue branded retail store credit cards on their behalf. For example, if you have a credit card with Rooms to Go, Abercrombie & Fitch, Discount Tire, Arhaus, Lowe’s, Conn’s, Bed Bath & Beyond, Mattress Firm, or hundreds of other well-known retailers you likely have an account with either Comenity Bank or Synchrony Bank. If you have a credit card with either The Home Depot or Costco, you actually have an account with Citibank.
None of the aforementioned retailers are out of business. They’re simply listed to illustrate the point that retailers are not usually their own credit card’s issuer. Unfortunately, not all well-known retailers are as fortunate as many have closed up shop. For example, Lord & Taylor and Stein Mart are going out of business and all Pier 1 rewards credit card accounts will be closed on October 30, 2020.
How Does This Impact My Credit Reports and Scores?
When a credit card is closed, regardless of the reason, the card issuer will report to the credit reporting companies that that account has been “closed by creditor.” That notation is not considered to be negative by any credit scoring systems so there’s nothing to worry about in that respect.
But, there are two aspects of the closure of which you should become aware. The first has to do with the age of the credit card account and the second has to do with the card’s credit limit.
When a credit card is closed, it is still included on your credit reports. It doesn’t simply disappear just because it has been closed. In fact, the three credit reporting companies (Experian, Equifax and Trans Union) will maintain inactive accounts for up to 10 years. This is favorable to the cardholder as your credit scores will still benefit from the age of the account, which continues to age even when it is closed.
There is a credit scoring myth that suggests you lose the value of the age of an account once it has been closed. This is incorrect. Closed accounts are still calculated into the “age”-related metrics of your credit scores, as long as the account is still on your credit reports.
When an account has been closed, either by you or the card issuer, you will no longer be able to use the line of credit or credit limit. And, credit scores may likely ignore the unused credit limit of your card once it has been closed. This can lead to a lower score especially if your card had a large credit limit and no balance, which is favorable to your credit scores as it helps you to maintain a lower balance-to-credit limit utilization ratio.
You can determine just how much your utilization ratio is going to spike by doing some simple math. Pull your credit report/s, which you can do for free at www.AnnualCreditReport.com. Add up the balances on all of your credit card accounts and the credit limits on all of your open credit cards, including retail cards. Divide the sum of the balances by the sum of your limits. That’s your revolving utilization ratio. You want that percentage to be as low as possible.
Now do the same math again but this time do not include the limit from retail cards that you fear may end up being closed. Unless none of your cards are going to be closed, your revolving ratio went up. If it went up too much, then your scores will suffer.
How Can I Protect My Scores?
Most retail store cards have relatively low credit limits. As such, even if you card issuer closes your account it might not be that big of an issue from a credit scoring perspective. But, if you have large balances on other cards and had a large limit on one or more newly closed retail cards, your scores can definitely go down.
You can protect your scores a variety of ways. First, you can pay down your credit card balances. That’s the smartest way to protect your scores because you’re also going to save money in interest fees.You can also open a new credit card account. The limit of the newly opened card will help to mitigate the damage because the new credit limit would be considered immediately when your credit scores are calculated. Just be careful not to run up too much of a balance,. or you’re going to net out the new card’s value to your scores.
The views and opinions expressed in this article are those of the author (credit expert John Ulzheimer) and not necessarily those of VantageScore Solutions, LLC.