What’s going to happen to your Sears credit card?

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What’s going to happen to your Sears credit card?
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Despite a generally healthy economy, many retailers are struggling to get people into their stores. Just recently, department store chain Sears filed for bankruptcy and plans to close nearly 200 Sears and Kmart stores. Given that, you may be wondering what will become of your Sears credit card now.

We’ve written about how owning a Sears or any store credit card is generally a bad idea (more on that later), but to illustrate our point and in light of the current news about Sears and Kmart, we thought it’d be a good idea to explain 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:

1. 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.

One of the biggest and most-known department stores of the 20th century was Montgomery Ward. It announced in late 2000 that it was closing its doors, but it’s run a digital-only business since then.

2. 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 are the bait they use to lure you in as a customer. Once the store fails though, those rewards and loyalty programs disappear as well.

In the case of Sears gift cards, customers are being told to call the retailer at 1-800-549-8151. The company also says for now, “We are accepting gift cards. Please come to our stores or shop online to use them.”

In the case of Toys R Us, the retailer said their reward cards would become useless in a matter of months. But then something amazing happened, Kmart announced that it would honor Toys R us gift cards.

3. 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 (it’s back now), 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 are not issued new cards. It just depends on the store, bank and situation.

4. 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.”

5. 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 cards in general. 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!

RELATED: Should this credit card practice be illegal?

“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.

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Craig Johnson is a conscious money-saver who still reads paperback books and listens to vinyl. He likes to write about how technology is making things easier and more affordable — but also sometimes more dangerous — for the modern consumer. You can reach Craig at [email protected]
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