Nothing says you are looking out for the consumer like being a big bank that suddenly decides to cut the lines of credit for every one of its personal borrowers in the United States—a move the bank acknowledges could have a negative impact on those who have used their credit.
In a statement today, Wells Fargo acknowledged the situation and noted it was a difficult decision. While they knew it would harm the credit of many blameless Americans, it still seemed worthwhile for Wells Fargo to do it. From CNBC:
The bank gave this statement: “In an effort to simplify our product offerings, we’ve made the decision 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.”
After publication of this article, a Wells Fargo spokesman gave additional remarks: “We realize change can be inconvenient, especially when customer credit may be impacted,” the bank said, adding that it was “committed to helping each customer find a credit solution that fits their needs.”
Credit scoring bureaus tend to score credit users (i.e. average Americans) by using many factors, one of which is the length of time they have held good credit. Closing accounts or holding accounts for limited times may have a negative impact on your credit report, but don’t worry, Wells Fargo is working on … well, they aren’t sure, CNBC continues.
Customers have been given a 60-day notice that their accounts will be shuttered, and remaining balances will require regular minimum payments at a fixed rate, according to the statement. When it was offered, the credit lines had variable interest rates ranging from 9.5% to 21%.
The move is a strange one given the banking industry’s need to boost loan growth.
The problem they have created shows us everything that is wrong with the credit rating system, something which we discovered prior thanks to the CFPB, as The Atlantic points out:
In personal finance, practically everything can turn on one’s credit score. It’s both an indicator of one’s financial past, and the key to accessing necessities—without insane costs—in the future. But on Tuesday, the Consumer Financial Protection Bureau announced that two of the three major credit-reporting agencies responsible for doling out those scores—Equifax and Transunion—have been deceiving and taking advantage of Americans. The Bureau ordered the agencies to pay more than $23 million in fines and restitution.
In their investigation, the Bureau found that the two agencies had been misrepresenting the scores provided to consumers, telling them that the score reports they received were the same reports that lenders and businesses received, when, in fact, they were not. The investigation also found problems with the way the agencies advertised their products, using promotions that suggested that their credit reports were either free or cost only $1. According to the CFPB the agencies did not properly disclose that after a trial of seven to 30 days, individuals would be enrolled in a full-price subscription, which could total $16 or more per month. The Bureau also found Equifax to be in violation of the Fair Credit Reporting Act, which states that the agencies must provide one free report every 12 months made available at a central site. Before viewing their free report, consumers were forced to view advertisements for Equifax, which is prohibited by law.
Much of an individual’s ability to improve his or her finances is predicated on his or her ability to maintain a high credit score. To do that, he or she needs to be able to see accurate credit reports that reflect the information that lenders see when they assess them. The actions of Equifax and Transunion prevented that. And that’s especially troubling because the American credit system is a reinforcing cycle. Good credit often comes from having enough money to pay bills off in a timely manner, which raises one’s score and provides access to more credit at better interest rates. That can amount to tens of thousands of dollars in savings on mortgages, business loans, and credit- card interest. And having good credit means that a person’s score can sustain the decline that comes with lender inquiries for new credit cards or loans, which then gives them access to more credit—and raises their score once again. For Americans with bad credit and little income, the system works in exactly the opposite manner, and leaves people relegated to pricey and predatory options for basic financial needs. In 2010, the CFPB found that 26 million Americans had no credit history, and another 19 million had such limited credit history that they were considered unscorable. These groups were primarily made up of low-income and minority households.
More Americans dumped into a system that is likely to drag their score down, through no fault of their own—just a decision by Wells Fargo. As a result, they may suffer other penalties, like higher interest rates, difficulty getting a loan, or buying a house.
Now is the time for a real push toward alternative credit scoring.
