Wells fargo discontinuing personal line of credit

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• Last week, Wells Fargo made the decision to cancel its personal line of credit offerings.
• If you want to keep banking with Wells Fargo, you may consider a credit card or personal loan.
• You can take out a personal line of credit at many other financial institutions.
• Read more of Insider's loan coverage here.

Wells Fargo will cancel all existing personal lines of credit and will no longer offer new ones, the bank notified customers in a letter last week.

Previously, these revolving lines of credit typically let consumers borrow $3,000 to $100,000. They were designed to help customers pay off credit card debt, fund home improvement projects, or replace overdrawn funds, among other uses.  

If you have a personal line of credit with Wells Fargo, this news will affect you — but you have options going forward.

Why is Wells Fargo shutting down personal lines of credit?

In a six-page letter to customers, Wells Fargo said it made the move to discontinue personal lines of credit to simplify product offerings and focus on credit cards and personal loans. The bank said this decision is final.

This isn't the first program cut the bank has seen of late; as a result of the pandemic, Wells Fargo halted home equity loans in 2020 and said it would stop providing auto loans to independent dealerships. The news also comes amid a major scandal that occurred in recent years. 

The company has continued to pay billions in settlements for its employees creating fake bank accounts to meet sales goals, which became public knowledge in 2016.

In 2018, the Federal Reserve banned Wells Fargo from growing its balance sheet until it addresses compliance issues uncovered by that scandal. While the bank did not explicitly say the move to close personal lines of credit was connected to getting out from under the federally mandated asset cap, it could help Wells Fargo do so.

How will the change impact your credit score?

Wells Fargo's news could affect your credit utilization ratio, or the percentage of the total credit you're using. Your credit utilization makes up around 30% of your credit profile.

Your credit utilization ratio will likely go up when your account is closed, which will negatively impact your credit score. Why? Because your total available credit will go down, while your debt will presumably stay the same. Lenders like to see a credit utilization ratio of 30% or less. 

For example, maybe your only existing line of credit is one with Wells Fargo. It has a limit of $20,000, and you've used $5,000 of this limit for a home improvement project. You currently have a credit utilization ratio of 25% (5,000/20,000).

But once your account closes, you'll have a ratio of 100% (5,000/5,000). This could have a substantial impact on your credit score if you're without another open line of credit, or if you already have a high debt balance.

Closing an account also reduces your number of accounts and the average age of those accounts, which may ding your credit score. (These factors don't impact your score as much as credit utilization, though.)

How do you repay your existing balance?

Wells Fargo will give you a 60-day notice before your personal line of credit is canceled. Once it closes, your remaining balance will have minimum monthly payments and a fixed interest rate. The minimum payment will be 1% of your remaining balance or $25, whichever is higher. The bank has yet to announce what the average fixed interest rate will be. 

Where else can you get a personal line of credit?

Many other financial institutions offer personal lines of credit, including banks, credit unions, and online lenders. Some top competitors include PNC Bank, Pentagon Federal Credit Union, US Bank, and SunTrust. Shop around with lenders to find out which company will give you the best rates and terms. 

Alternatives to personal lines of credit

Personal lines of credit are revolving lines of credit, which allow you to borrow money repeatedly up to a set limit, then repay a portion of the current balance through regular payments.

Personal lines of credit are often used for big purchases like home improvement projects or consolidating debt. Interest rates are usually variable, which means they are subject to change after a predetermined period. Interest only accrues on the amount you have actually drawn, though.

Although you may choose to get a personal line of credit from another institution, you have other options. You may prefer one of the following methods, especially if you want to stay with Wells Fargo:

• Credit cards. Credit cards are also revolving credit lines, meaning you draw from a line of credit each time you swipe your card and make monthly payments on that debt. You usually have a lower credit limit with a credit card than with a line of credit, and cards are often used for smaller purchases. A credit card may be a good choice if you qualify for a perk like interest-free payments for a designated amount of time, as this could give you the wiggle room to pay off debts without added costs.
• Personal loans. A personal loan will come as a lump sum payment, and you'll repay it with a fixed interest rate. Otherwise, personal loans function similarly to personal lines of credit. Both are commonly used to finance large purchases and can have a positive impact on your credit score provided you make consistent monthly payments. A personal loan may a good option if you know how much money you'll need upfront and are comfortable with a steady repayment schedule.

Wells Fargo's decision to shut down personal lines of credit may have a negative impact on your credit score and force you to consider an alternative, but you'll have a 60-day window to consider your options.

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