Private-label credit cards, or store credit cards, are seeing delinquency levels that are the highest since 2011, according to Equifax. Nearly 5% of store credit card debt is severely delinquent, up by a significant 57 basis points from a year ago.
Even more troubling is one of the reasons behind the uptick in delinquencies. It appears that some consumers are making a serious mistake with their private-label credit cards that you definitely should try to avoid.
Why are delinquencies rising?
There are several potential reasons for the rising private-label card delinquency rate. For starters, consumer confidence has been on the rise, and many people may find themselves in over their head with debt. Or, rising interest rates over the past couple of years may have made many customers' payments less affordable.
However, the most troubling reason is that some people are simply not paying their debt because the retailer attached to the credit card has gone out of business.
According to Amy Crews Cutts, Equifax's chief economist, "With these higher delinquency rates in private label cards, we see that some consumers are abandoning their payment responsibilities when retailers close a local store or declare bankruptcy."
You still have to pay, even if the store goes bankrupt
To be perfectly clear, not paying a store credit card balance because the store closes is a terrible idea.
For one thing, retail stores don't actually issue credit cards. There's a lender that issues the card in partnership with the retailer -- companies like Synchrony Financial and Comenity Bank are common store credit card co-branding partners. So, while many of the stores these lenders have issued cards for have gone bankrupt in recent years, these financial institutions are alive and well -- and they want their money.
In other words, you don't owe the retailer a dime. You owe your outstanding balance to a bank. Whether the retailer whose logo is on the credit card still exists or not is irrelevant.
What happens to your store credit card after the retailer shuts down?
The short answer is "it depends." Obviously, there's no need for a branded credit card for a retailer that no longer exists.
However, different situations are dealt with differently. In some cases, the retailer's credit cards will be terminated altogether -- account holders will be obligated to pay their balances, but no new charges can be processed. This is especially true if the card in question is not a Visa or MasterCard product and can only be used for purchases at that specific retailer.
In other cases, especially in the case of Visa or MasterCard co-branded card, accounts are transitioned to an alternative credit card product. For example, my wife was a Babies R Us credit card holder, and shortly after parent company Toys R Us declared bankruptcy, issuing bank Synchrony sent a letter informing her that an alternative, rather generic, MasterCard credit card would be issued.
Whether your card program is closed down or transitioned to an alternative credit card, the bottom line is that you still owe the money.
What happens if you don't pay?
In a nutshell, not paying a store credit card just because of a bankruptcy can destroy your credit. If you have a strong credit score, a single late payment can cause your FICO credit score to fall by as much as 90-110 points. With a serious delinquency (generally defined as more than 90 days late) or a charge-off, it can be much worse.
As a final thought, not only should you be sure to continue paying credit card debt even if the retail partner goes bankrupt, but it's also a good idea to prioritize repaying it as fast as possible. Store credit cards tend to have some of the highest APRs in the industry, and with the forecast for several more Federal Reserve interest rate hikes, things are only going to get worse.