What Happens to Credit Card Debt if a Bank Fails?

In the unlikely event of your bank failing, will your credit cards continue to exist?

In the past month or so, we've seen a few high-profile bank failures and several others that experts have expressed concerns about. For everyday consumers, FDIC insurance will make sure your deposits of up to $250,000 per institution are safe, but what if you owe the bank money on a credit card?

The short answer is that you still owe the money. But there's a lot more to the story than that, and there is some degree of uncertainty as to whether your credit card account will continue to exist. So, in the unlikely event the bank that issued your credit card fails, here's an idea of what you can expect.

You still owe your credit card balance

When a bank fails, it is taken into receivership by the Federal Deposit Insurance Corporation, or FDIC. The FDIC's preference is that the bank's assets and deposits will be bought by a healthy bank immediately, but if there is no buyer, a temporary FDIC-controlled bank can be established to ensure the continuity of operations.

In either case, there are a few important points to know.

• First and foremost, you still owe the money. If your bank fails, your credit card balance doesn't go away. The same is true for any other loans you may have at a failed bank.
• Second, you should receive a communication within a few weeks regarding who you should send future payments to. If you haven't heard within a reasonable timeframe, reach out to whatever bank acquired your failed bank. Or, check the FDIC's press release announcing the bank's closure for information. For example, when Silicon Valley Bank failed, the FDIC's press release said that "loan customers should continue to make their payments as usual."
• Third, your account will continue to exist and its terms will remain the same unless you hear otherwise. As we'll see in a real-world example in a bit, acquiring banks can certainly choose to close credit card accounts.

What has happened in the past?

The largest bank failure in U.S. history was Washington Mutual at the height of the financial crisis in September 2008. At the time, Washington Mutual was a top-10 credit card issuer with about 15 million open credit card accounts and a total of $25 billion in outstanding balances.

JPMorgan Chase acquired Washington Mutual upon its failure, including its credit card portfolio. So, Washington Mutual's customers were now Chase credit card customers and started making their payments accordingly.

However, JPMorgan Chase's management felt that Washington Mutual's credit card portfolio was of less-than-stellar credit quality and started making some changes. Some accounts were abruptly closed soon after the bank was acquired, and other cardholders reported having their account terms (such as their minimum payment requirements) modified. And yes, if a bank closes your credit account, you still owe the money and must make payments as agreed. You just can't make any new purchases.

The bottom line

I've said it a few times, but it's worth repeating: If your bank fails, you still owe any outstanding balances on credit cards or other loans. The only immediate change is what bank you owe the money to.

Having said that, it's entirely possible that your credit card account could end up being closed, or your account terms could be modified by the acquiring bank. You'll typically get a fair amount of notice before your account terms change, but account closures can take effect immediately if the new bank decides to do it. So, if your bank fails, make sure you pay attention to any payment instructions from the FDIC or the acquiring bank, and keep an eye out for any account changes that may be coming.