Wells Fargo account closures highlight vague cost of a credit coup

This month, Wells Fargo (WFC) announced the closure of personal lines of credit, a loan product that consumers could use to consolidate debt, pay unexpected expenses, or even use as a safety net for overdrafts.

The decision came after an early 2020 review of its business, where the bank found that personal lines of credit were not as popular as loans, and only 40% of account holders had balances, said. a bank spokesperson at Yahoo Finance. (The main difference between a personal line of credit and a credit card is that a line of credit may have a higher credit limit than a credit card, making it more suitable for large purchases; lines of credit usually have a lower APR than lines of credit. A credit card.)

The news has left a bad taste in the mouths of some consumers, mainly because reports have emerged of the impact of the closure on customer credit scores.

The San Francisco-based bank waited until the worst of the pandemic had passed before moving forward with its decision to ditch personal lines of credit (given that its image was previously tarnished by the fake accounts scandal of 2017. Wells was undoubtedly more careful to do anything that seemed hostile to customers).

In March, Wells Fargo began phasing out product withdrawal with a pilot program. After a 60-day, 30-day, and final notice period, feedback on the changes has been “better than we expected,” a Wells Fargo spokesperson said.

But when the bank publicly unveiled the decision this week, a line in the FAQ section of the ad resulted in an overhaul of the struggling bank’s past with the open / closed account section, and some were not happy, including Senator Elizabeth Warren, a frequent critic of Wells Fargo. The bank said the closure “could” have an impact on a customer’s credit rating, but would not be considered derogatory on a credit report.

A FICO credit score is based on a combination of factors: 30% of amounts owed, 35% payment history, 10% new credit, 15% length of credit history, and 10% credit combination. With the closure of an account by Wells Fargo, there is a good chance it will have an effect on people’s scores given the above factors, although the bank has claimed it does not “determine or know “the factors that make up a credit score.

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How much does 10 points cost? A lot or a little.

Wells Fargo did not say how many customers are using these accounts, but said the variable interest rate on the loans would be locked in at a reasonable rate and then minimum payments would be required to pay off the rest. Other loan products are available if customers need more money, even if they have to reapply.

This leaves consumers with potential damage to their credit scores. There is no specific number of points associated with closing an account, but the TransUnion credit bureau notes that it may be significant enough to warrant keeping the old lines open or at least thinking about what. we must close.

The fake account scandal probably also led to salty credit, as consumers who found open credit card accounts subsequently decided to shut them down. But as then, it is difficult to quantify the monetary damage.

The bank said it did not plan to compensate customers for the potential damage to the credit score. It would be difficult, as a person’s unique circumstances have an incredibly varied impact.

As Bankrate notes, threshold-based methods for deciding who is eligible for which loans at what interest rates can matter. Based on its 2015 data, a mortgage of $ 300,000 for a person with a credit score of 680 would pay 3.709% for a 30-year fixed mortgage, while a borrower with a score of 639 would pay 4.899%. . The difference of these 41 points would result in an expense of $ 2,520 per year. (If this loan were made with a 20% down payment, a 21-point credit score spread would have a similar difference, according to Fannie Mae’s data on price adjustments.)

Of course, credit scores only affect a consumer’s costs if they borrow money, as well as the amount. So while the credit scores of 100 people can be affected, it can be in 100 different ways.

Knowing exactly how many points could result from a closed account is, again, unclear. When applying for a credit card, five or 10 points may come off, only to return a few months later, as the number of credit applications in a given period, which affects scores, changes.

Another problem for customers who have used their lines of credit is that they will have to re-apply for more loans.

If Wells Fargo’s closure of its previous account has an effect on its credit rating and credit report, do these changes in a person’s credit history affect the interest rate on new products? If this were the case, closing these accounts would result in increased interest income for the bank.

A spokesperson for the bank declined to answer whether or how closing the account would factor into the interest rate on a new loan via the credit score.

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Ethan Wolff Mann is a writer at Yahoo Finance who focuses on consumer issues, personal finance, retail, airlines, and more. Follow him on Twitter @ewolffmann.

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