Wells Fargo has sent letters to its customers notifying them that all personal lines of credit through the bank are being closed, and it will no longer offer that product to new customers. The lines of credit enabled users to borrow $3,000 to $100,000.
The reasoning Wells Fargo gave for the change was that it would help the company focus on credit cards and personal loans. It had already ceased accepting applications for new home equity lines of credit in 2020. The bank didn’t specify the number of customers that would be affected by the change.
What happened to Wells Fargo?
In 2018, the Federal Reserve placed new limitations on Wells Fargo, prohibiting it from growing its balance sheet until it repaired compliance issues.
CNBC explained that Wells Fargo has lost billions of dollars due to the asset cap, impacting its ability to compete with JPMorgan Chase and Bank of America. Wells Fargo did not say whether the Fed’s asset cap influenced the decision.
Scandal has plagued the company in recent years, including a debacle over fake accounts being created between 2002 and 2016 and damaging customers’ credit scores by unlawfully using their information. In Feb. 2020, Wells Fargo was hit with a $3 billion fine for settlement with the Department of Justice and the SEC.
What’s the difference between a personal line of credit and a credit card?
A personal line of credit is not the same as a credit card, but both are types of revolving credit, in which users can borrow against a certain credit limit instead of taking a loan in a lump sum.
A credit card typically comes with a higher interest rate than a personal line of credit, making it a more costly way of borrowing money. Credit cards also usually have lower borrowing limits.
Because of their higher borrowing limits and lower interest rates, personal lines of credit are often considered a better option for costly expenses like home renovation projects. Since a home renovation can be expensive but borrowing needs vary from month to month, a personal line of credit is a useful tool.
For other needs, adding a credit card can be best. Credit cards can remain open for many years, while a line of credit is limited to a draw period of a few years. A personal line of credit must also be repaid within a certain time frame, whereas a credit card offers a grace period on interest charges. Credit cards may provide rewards for purchases as well, so if you pay your balance in full monthly, you can earn free perks for your everyday spending.
How will this impact customers?
Wells Fargo provided a warning to customers within its letter, saying that this closure could have a negative impact on their credit scores.
Senator Elizabeth Warren criticized Wells Fargo on Jul. 8, saying it was unfair for customers’ credit to suffer due to failures of the company and merely sending a letter wasn’t enough. Customers received a 60-day notice of the closure and will need to make regular fixed-rate payments on the remaining balances.