Ask Money

Bank trouble and a credit card

Chris Farrell Nov 21, 2008

Question: I have a Citi Bank credit card as my primary credit card. The account is in good standing with no debt, but what happens if Citi Bank collapses, files for bankruptcy, or merges with another company? Also, what about my interest rate, credit card benefits (such as cash back, airline mileage, etc.), and terms of use if something happens to Citi Bank? Sincerely, Andrew, PA

Answer: Citigroup’s stock is getting pounded again today. Like GM, investors are losing faith in another icon of Corporate America. The mammoth banking conglomerate has lost 60% of its market value since last Friday and now trades at a 15 year low. Citi hasn’t posted a profit in four quarters–unlike several of its major rivals–and the outlook is steadily worsening with the sinking economy and deteriorating credit.

I suspect central bankers and finance ministers worldwide will hold non-stop transatlantic meetings over the weekend about how to deal with the recent precipitous decline in Citi and other financial services stocks. After all, Goldman Sachs is now trading below its initial public offering price. Goldman is no longer the financial services industry’s gold standard but a tarnished benchmark.

Citi is one of the biggest issuers of credit cards in the country with some 54 million cardholders. Although the bank has announced it’s raising credit card rates on substantial portion of its credit card accounts by 2 to 3 percentage points–supposedly less than 20% of the total–the credit card portfolio is still one of its most valuable franchises.

How will you fare if yet one more unthinkable happens, that Citi sells off assets, gets acquired or the government buys an even bigger stake in the financial services institution? My bottom line: You’re fine. Put it this way: If Citi really got into trouble your credit card account would be considered an asset worth owning. And if the past is any guide your credit card will work and you won’t be left stranded.

However, a couple of cautions or safeguards. If Citi does get deeper into trouble, read your credit card mail carefully. The new owner might have information for you. For instance, a new owner may change the size of your line of credit. But the typical experience is for a new owner to honor most of the terms of your existing deal. Over time it may bring about changes so that there is only one interest rate, fee, penalty and other policies for all its credit cards.

Most importantly, continue to pay your bill on time.

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