Banks Scramble to Address Portfolio Concerns But Negatively Impact the Credit Scores of Customers in the Process

 

Big Bank Wells Fargo announced yesterday that it will no longer sell personal lines of credit.  This move will negatively impact the credit scores of these customers.

CNBC reported yesterday:

Wells Fargo is ending a popular consumer lending product, angering some of its customers, CNBC has learned.

The bank is shutting down all existing personal lines of credit in coming weeks and no longer offers the product, according to customer letters reviewed by CNBC.

The revolving credit lines, which typically let users borrow $3,000 to $100,000, were pitched as a way to consolidate higher-interest credit card debt, pay for home renovations or avoid overdraft fees on linked checking accounts.

“Wells Fargo recently reviewed its product offerings and decided to discontinue offering new Personal and Portfolio line of credit accounts and close all existing accounts,” the bank said in the six-page letter. The move would let the bank focus on credit cards and personal loans, it said.

Those customers who will be affected will also see their credit scores reduced.  These potentially hundreds of thousands of customers will see a drop in FICO scores, which is one major factor in a person’s amount of ‘untapped’ credit available.  When a person’s ‘untapped’ credit is no longer available, their creditworthiness is lowered resulting in the former customers being a higher risk borrower.

Experion, which is one of the rating agencies, says the following about a credit utilization rate:

Your credit utilization rate, sometimes called your credit utilization ratio, is the amount of revolving credit you’re currently using divided by the total amount of revolving credit you have available. In other words, it’s how much you currently owe divided by your credit limit. It is generally expressed as a percent. For example, if you have a total of $10,000 in credit available on two credit cards, and a balance of $5,000 on one, your credit utilization rate is 50% — you’re using half of the total credit you have available. You can calculate an overall credit utilization rate as well as a rate for each of your credit accounts (called your per-card ratio).

The result is that if you have less available credit and your outstanding balances don’t change, your score will decrease, potentially impacting some customers’ ability to borrow money in the future due to a lower credit rating.

This move may be good for Wells Fargo but certainly won’t help its customers with personal lines of credit as we enter into this period of uncertainty in the US economy.