Elizabeth Warren blasts Wells Fargo for ending personal lines of credit — here’s why that decision could hurt your credit score

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Elizabeth Warren has sharp words for Wells Fargo.

The bank is discontinuing personal lines of credit and will shut down existing ones in the coming weeks, CNBC reported, citing customer letters it has reviewed. The bank is under increased regulatory pressure in the wake of recent scandals.

In a “frequently asked questions” section of a letter sent by the back, Wells Fargo warned that the discontinuation of such bank accounts may impact customers’ credit scores. The news comes at a time when Americans are borrowing more money.

Sending out a warning notice simply isn’t good enough.

— Senator Elizabeth Warren (D., Mass.)

Senator Elizabeth Warren (D., Mass.) reacted swiftly and bluntly to the news. “Not a single @WellsFargo customer should see their credit score suffer just because their bank is restructuring after years of scams and incompetence.”

“Sending out a warning notice simply isn’t good enough. Wells Fargo needs to make this right,” she wrote on Twitter TWTR, +3.20%. Warren is the former director and founder of the Consumer Financial Protection Bureau.

Wells Fargo’s WFC, +3.76% soon-to-be discontinued product involves $3,000 to $100,000 in revolving credit lines, and was marketed as a way for customers to consolidate higher-interest credit-card debt or avoid overdraft fees on checking accounts.

A Wells Fargo spokesman told MarketWatch: “As we simplify our product offerings, we made the decision last year to no longer offer personal lines of credit as we feel we can better meet the borrowing needs of our customers through credit-card and personal-loan products.”

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“We realize change can be inconvenient, especially when customer credit may be impacted. We are providing a 60-day notice period with a series of reminders before closure, and are committed to helping each customer find a credit solution that fits their needs,” he added.

Credit-utilization ratio

The change could impact customers’ credit-utilization ratio, a calculation by credit-reporting companies of how much debt a consumer is carrying compared with how much overall credit they have available.

This accounts for approximately 30% of FICO’s FICO, +1.74% credit-score analysis. “FICO research has found that your level of debt is predictive of future credit performance,” the company says.

Consumer demand for credit cards, personal loans, plus auto loans, and leases, has risen by nearly 40% in April on the year, according to data released this week by credit-reporting company Equifax EFX, +1.47%.

“The issue is specific to Wells Fargo. Basically, they’re in the Federal Reserve’s penalty box because of past regulatory issues,” said Ted Rossman, senior industry analyst at CreditCards.com.

Wells Fargo is facing stricter oversight and asset caps compared to its competitors, he said. “I don’t think their decision to exit the personal lines of credit business should be seen as a sign that others will follow suit,” Rossman said.

“They still have to pay back any money they borrowed, but the line of credit will no longer be available for additional borrowing, and this could cause their credit utilization ratio to spike and their credit score to fall,” he added.

Plagued by scandal

The bank has been plagued by scandal. Last year, Elizabeth Duke resigned as chairman of its board of directors, days before she was set to testify at a Congressional hearing on the fallout from the 2016 fake-account scandal.

The bank has faced a slew of lawsuits for opening some 2 million savings and checking accounts for customers without their consent. The Department of Justice said the scheme lasted a decade and involved thousands of bank workers.

Also last year, the bank fired over 100 employees for allegedly defrauding a federal pandemic-relief program. “These wrongful actions were personal actions, and do not involve our customers,” the bank said in a memo at the time.

An internal investigation concluded that up to 125 employees made false statements when applying for Economic Injury Disaster Loans, a kind of small business relief loan, the Associated Press reported.

Lending outlook

Looking ahead and beyond Wells Fargo, Rossman said he has sensed a major shift among U.S. lenders, particularly credit-card issuers.” They’re less worried about COVID and jobs and the economy and looking to grow again,” he said.

“Whereas credit-card marketing was greatly reduced for much of 2020 and early 2021, all of a sudden, there’s hot competition for consumers’ business as card issuers look to capture as much of the consumer spending rebound as possible.”

“We’re seeing record-high sign-up bonuses on several credit cards (particularly travel cards), and 0% offers on balance transfers and new purchases are becoming abundant once again,” Rossman said.

Low interest rates make it a good time to look into a balance transfer card. “I’m seeing 0% offers as long as 20 months. In general, I’d say someone with a credit score of 700 or above is a good candidate to be approved, he said.

Americans can hire a financial adviser and/or seek the help of a credit-counseling bureau. Note the difference between a “debt management” organization and a “debt settlement” company that offers legal and financial services.

The former category includes nonprofit organizations that belong to the National Foundation for Credit Counseling, while the latter is made up of for-profit companies. Rossman advises consumers who need advice to seek out the former.

On Friday, Wells Fargo shares closed up 3.7% after falling 1.6% Thursday, and have gained 45% so far this year, while the S&P 500 SPX, +1.13%  closed up 1.1%. The Dow Jones Industrial Average DJIA, +1.30% closed up 1.3% Friday.

Read: ‘The language of consumer debt is rife with moral undertones’: Read MarketWatch’s new Extra Credit column

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