What to do if Wells Fargo cancels your personal line of credit
- Last week, Wells Fargo made the decision to cancel its personal line of credit offers.
- If you want to continue banking with Wells Fargo, you may want to consider a credit card or personal loan.
- You can get a personal line of credit from several other financial institutions.
- Learn more about Insider loan coverage here.
Wells Fargo will cancel all existing personal lines of credit and will no longer offer new ones, the bank informed in a letter last week.
Previously, these revolving lines of credit generally allowed consumers to borrow from $ 3,000 to $ 100,000. They were designed to help customers pay off credit card debt, finance home improvement projects, or replace overdraft funds, among other uses.
If you have a personal line of credit with Wells Fargo, this news will affect you, but you have options for the future.
Why is Wells Fargo closing personal lines of credit?
In a six-page letter to customers, Wells Fargo said it has made the decision to discontinue personal lines of credit to simplify product offerings and focus on credit cards and personal loans. The bank said this decision is final.
This is not the first cut program the bank has seen in recent times; in the wake of the pandemic, Wells Fargo suspended home equity loans in 2020 and said it would stop providing auto loans to independent dealerships. The news also comes amid a major scandal that has unfolded in recent years.
The company continued to pay billions of dollars in settlements for its employees creating fake bank accounts to meet sales targets, which became common knowledge in 2016.
In 2018, the
has banned Wells Fargo from increasing its balance sheet until it resolves compliance issues uncovered by the scandal. While the bank did not explicitly say that the decision to close personal lines of credit was tied to moving out of the federally mandated asset cap, it could help Wells Fargo do so.
How will the change impact your credit score?
Wells Fargo news could affect your credit usage rate, or the percentage of total credit you use. Your credit usage represents approximately 30% of your credit profile.
Your credit usage rate will likely increase when your account is closed, which will negatively impact your credit score. Why? Because your total available credit will go down, while your debt is likely to stay the same. Lenders like to see a credit utilization rate of 30% or less.
For example, your only existing line of credit may be with Wells Fargo. It has a limit of $ 20,000, and you have used $ 5,000 of that limit for a home improvement project. You currently have a 25% (5,000 / 20,000) credit utilization rate.
But once your account is closed, you will have a ratio of 100% (5,000 / 5,000). This could have a substantial impact on your credit score if you don’t have another line of credit open or if you already have a high debt balance.
Closing an account also reduces your number of accounts and the average age of those accounts, which can hurt your credit rating. (These factors don’t have as much of an impact on your score as using credit, however.)
How do you pay off your existing balance?
Wells Fargo will give you 60 days notice before canceling your personal line of credit. Once it is closed, your remaining balance will have minimum monthly payments and a fixed interest rate. The minimum payment will be 1% of your remaining balance or $ 25, whichever is greater. The bank has not yet announced what the average fixed interest rate will be.
Where else can you get a personal line of credit?
Many other financial institutions offer personal lines of credit, including banks,
, and online lenders. Major competitors include PNC Bank, Pentagon Federal Credit Union, US Bank and SunTrust. Shop around to find out which company will offer you the best rates and terms.
Alternatives to personal lines of credit
Personal lines of credit are revolving lines of credit, which allow you to borrow money repeatedly up to a set limit, then pay off part of the current balance in regular installments.
Personal lines of credit are often used for large purchases like home improvement projects or debt consolidation. Interest rates are generally variable, which means that they are subject to change after a predetermined period. However, interest only accrues on the amount you actually have withdrawn.
While you can choose to get a personal line of credit from another institution, you have other options. You may prefer one of the following methods, especially if you want to stay with Wells Fargo:
- Credit card. Credit cards are also revolving lines of credit, which means you draw on a line of credit every time you swipe your card and make monthly payments on that debt. You usually have a lower credit limit with a credit card than with a line of credit, and the cards are often used for smaller purchases. A credit card may be a good choice if you qualify for a benefit such as interest-free payments for a specified period of time, as it could give you leeway to pay off your debts at no additional cost.
- Personal loans. A personal loan will come as a lump sum payment, and you will pay it off with a fixed interest rate. Otherwise, personal loans work the same way as personal lines of credit. Both are commonly used to fund large purchases and can have a positive impact on your credit score as long as you make regular monthly payments. A personal loan can be a good option if you know how much money you’ll need up front and are comfortable with a regular repayment schedule.
Wells Fargo’s decision to close personal lines of credit may negatively impact your credit score and force you to consider an alternative, but you will have a 60-day window to consider your options.