Are Your Credit Cards Safe During a Banking Crisis?

A bank failure does not have a dramatic impact on credit cards.

With the failure of Signature and Silicon Valley Banks you may find yourself wondering what happens to your bank products when a bank fails. For example, what can you expect to happen to a bank-issued credit card?

The insurer

Bank failures are relatively rare, but when it does happen, several protections are put into place simultaneously. If the bank is insured by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA), the insurer immediately steps in to begin its process.

One of the first things the insurer will do is notify each depositor in writing, using the address on record with the bank. It then takes on the important task of paying depositors back. FDIC and NCUA each provide insurance of up to $250,000 per depositor, per insured bank, for each ownership category.

As the "receiver," the insurer is also responsible for selling bank assets and settling outstanding debts. These include customer claims made for deposits in excess of the insured limits.

Your credit card

Credit cards are lucrative for banks and the outstanding debt associated with credit cards makes them an attractive purchase. For this reason, if you have a credit card with a failed banking institution, that credit card is considered an asset, and is sold to another bank.

In the meantime, the terms of your card agreement do not change and you are still responsible for making payments. The same is true of any other loans you may have through a failed bank, including mortgage, auto, and personal loans.

Once the debt has been sold to another financial institution, you will again be notified by mail and directed to submit payments to the new lender.

Rewards points

To get a better sense of whether the rewards points you've accumulated will survive a bank failure, it helps to know who owns the points.

Is it a "brand" card?

A brand credit card earns points directly from the credit card issuer. For example, if you have an American Express® Gold Card, all points are issued through Amex.

Is it a cobranded card?

A cobranded card is a partnership between the credit card issuer and a third party, like an airline or hotel. For example, the Delta SkyMiles® Gold American Express Card is a partnership between American Express and Delta Air Lines.

Chances are, your rewards points are perfectly safe

The only way you can lose rewards points is if your credit card was issued by the failed bank. For example, if you had a Capital One card and Capital One failed, rewards points would have to be sorted out.

Even if the card was issued by a failed bank, rewards points are not typically lost. Rewards programs are profitable and help banks retain customers. Once the failed bank sells its credit card debt to another bank, the new bank is unlikely to touch existing rewards points.

If a credit card was a result of a partnership between a failed bank and an airline or hotel, there's a good chance the airline or hotel chain would step up to honor the points, if for no other reason than to retain loyal customers.

Bank failures are scary business, but that's why so many safeguards have been put in place to protect your assets. Fortunately, those safeguards also protect your credit cards.