Why is Wells Fargo shutting down personal lines of credit?
In an unsettling move that has outraged consumers and stunned the credit industry, Wells Fargo as the 3rd largest bank in america, has discontinued personal lines of credit. Despite resounding frustration, the bank’s decision is final and will no longer offer new lines of credit.
The revolving lines of credit being closed down, primarily were offered as debt consolidation loans. Despite a spokesperson explaining the decision as a means to better meet consumer borrowing needs through credit cards and personal loans, the decision is widely seen as damaging to a huge number of consumer credit scores.
Whether you’re affected by Wells Fargo’s decision directly or not, the closure news highlights that reliance on debt and dollar products in traditional credit scoring data is systematically at risk of failure for consumers. In this article we explore how Alternative Credit Data and Neobanks as a new normal can create a much needed foundation.
How will the news impact consumer credit scores?
Closing such a large credit line without a change in debt can negatively impact the credit utilization ratio which accounts for around 30% of a traditional credit profile. This is one of the most influential score factors and is often used in lending decisions.
What does this mean for the credit industry?
While this news only involves one bank, and not indicative of an industry trend with large banks, JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc. and U.S. Bancorp comprising the rest of the top 5 list, the decision does speak to a broader issue with debt and dollar products being primarily used to value credit worthiness - the notion that a consumer’s financial fitness is at the behest of large banks.
Are there any options for consumers to avoid such reliance on traditional credit and banking?
As the world has now become accustomed to change, since the pandemic shook every aspect of our lives, institutions and future, our acceleration toward non-traditional banking, credit scores and lending decisioning, is in motion. In the two years prior to the pandemic, consumers leaving banks sat at roughly 12%, between 2020 and 2022 it’s projected to be 27% for those large brick and mortar banks.
According to InsiderIntelligence, Neobanks like Dave and Varo will add close to 19 million US accounts between 2021 and 2025. Where 2025 should see nearly 40 million US adults hold accounts at digital-only banks.
Fueled by economic volatility, this exodus to digital-only banks has also shifted focus onto customer experience as a key differentiating factor, especially for the under 30s. In WEF’s Global Shapers Survey 72% of millennials said they don’t trust banks to be fair and honest.
In tandem, this disruption has seen Alternative Credit Data gain popularity among financial institutions, especially Neobanks, and could soon be considered mainstream. Next we’ll explore how Alternative Credit Data is being used as a key contributor in evaluating borrowers risk and consumer creditworthiness.
What is Alternative Credit Data and how does it factor into lending decisions?
Alternative credit data refers to forms of credit data that isn’t typically included in traditional credit reports and infurs a much wider range of data types, inevitably providing a much broader view of creditworthiness. A LevelCredit article on What is Alternative Credit Data? describes those data types as;
- Rent payments.
- Utility payments (including cell phone).
- Money management markers, such as how long bank accounts have been open, frequency of withdrawals and deposits, and amount of savings.
- Property and asset records, including the value of owned assets.
- Alternative lending payments such as payday loans, installment loans, rent-to-own payments, buy-here-pay-here auto loans, and auto title loans.
- Demand deposit account (DDA) information, including recurring payroll deposits and payments, average balance, etc.
The shift to a clearer picture of a person’s financial responsibility through Alternative Credit Data, such as rent, is not a fad, and not to be confused with self-reported credit data, which ultimately does not factor into lending decisions. FICO® '09 includes both rent and utilities. A 2020 State of Alternative Credit Data whitepaper produced by Experian noted 74% of financial institutions use other information in lending decisions, and 89% of lenders believe Alternative Credit Data allows them to extend credit to more consumers.
What does this mean for the future?
In turbulent times, alternative data such as rent reporting, allows users to create a broader, fairer and in terms of the Wells Fargo news, a much more stable method of building credit. For lenders, a clearer picture reduces their credit risk exposure.
In addition, a report issued by the Consumer Financial Protection Bureau stated that as of 2010, about 26 million Americans (that’s about 11% of the adult population then) were considered “credit invisible”. Expert speakers at an Urban Institute Financial Inclusion discussion noted Alternative Credit Data can help 50 million currently unscoreable consumers and raise credit scores for those with thin files.
Alternative credit data has the power to bring everyone into the lending economy.
