Wells Fargo has announced that they are closing their customers’ personal lines of credit soon, and will no longer offer this kind of loan.
A personal line of credit is a revolving loan offered by a lender much like a credit card, but without the accompanying card itself. The credit line is used by borrowers to consolidate other debts or get quick cash.
Wells Fargo will still offer traditional personal loans, credit cards mortgages and other kinds of capital loans. It’s only the revolving personal loan that is being discontinued.
How Wells Fargo’s decision will affect borrowers’ credit
There are many ways this could potentially impact accountholders negatively:
- Wells Fargo’s personal lines of credit ranged between $3,000 and $100,000. Holders of these accounts will see a drop in their credit scores, as their total credit limit will go down by whatever amount they qualified for. An account holder with a high credit limit will be impacted greatly by the loss in their borrowing capacity.
- Further, anyone with an outstanding balance owed will see an even bigger score drop, as their utilization ratio will take a double hit—they owe money against an account that has been closed, putting their utilization in the negative for that account.
- The closure of these lines of credit could also affect a borrower’s “length of credit history” category, which makes up 15% of one’s FICO score.
- Losing a personal line of credit will also negatively impact one’s “credit mix” which is 10% of one’s credit score. Healthy credit should involve different kinds of loans, and not just credit card debt. A personal line of credit would have been a unique kind of lending product to have in one’s credit mix.
- Between the loss of borrowing capacity, shortened length of credit history, impact to credit mix, and the potential to owe money against an account that has been closed, borrowers with Wells Fargo personal lines of credit are almost certain to see their credit scores drop when their accounts are closed.
What to do about it
In the short term, Wells Fargo has given their customers 60 days’ notice before the loans are to be discontinued. That means anyone with a Wells Fargo personal line of credit should strive to get it paid off within 60 days to minimize the impact of this change.
Beyond that, follow all of our standard advice when it comes to how to get the highest credit score.
The right way to do debt consolidation
Speaking of our standard advice, we’ve always advised borrowers to stay away from consolidation loans, and this Wells Fargo story is a good example of why.
When we talk about debt consolidation on our site, we caution that consolidation loans are risky to both the borrower and lender, and we’ve said “Not many trusted companies offer debt consolidation loan programs without collateral.”
For Wells Fargo, the risks clearly outweighed the benefits, and they’re no longer offering personal lines of credit.
If you need to consolidate credit card debt, the best way to do it is to consolidate the payments through a plan to pay off the debt entirely, not roll the debt into a new loan or line of credit that allows you to keep borrowing.
Anyone who is not a Wells Fargo customer should still take this event as a cautionary tale: don’t borrow too much on any one account, and try to keep your overall borrowing at a minimum. If you carry too much debt or have all of your debt concentrated in one credit line, you’re at great risk of the lender takes the kind of action Wells Fargo has in this case.
If you’re worried about your credit mix and whether you’re protected from this kind of action by any of your lenders, talk to a certified debt coach for free and make sure you’re prepared for whatever might happen next.