Collection notice from First National Collection buereau

In september 2008 during my shopping on an OldNavy store they asked me to apply for a credit card in the store, they didn't gave me much details and only told me that its a store card and I can open an account with them and I applied for account with them in the store. However, my credit card application was declined at the store itself and I paid full amount for the purchases I made right there. I did not make any purchases after that.
Now I received a notice from First National Collection Bureau Inc. saying I owe them 214.36 dollars as part of credit card debt.
Couple of things I want to mention here:
1. I have never received or seen a credit card or any statements from Old Navy.
2. Due to job loss I had to leave my rented house in 2008 and I never received any communication from the credit card company regarding this transaction.
3. March 10th 2011 I received a collection notice from an agency which is asking me for the total amount of $214.36.

Now I am really depressed because I never saw or used this credit card in my life and I am not even aware of this transaction.
Please advide how to overcome from this debit charge as they have also reported this to credit rating agencies and it has already started effecting my credit history.