Wells Fargo Is Shutting Down Personal Lines of Credit. Should Franchise Buyers Be Worried?

If you were counting on a personal line of credit from Wells Fargo to help finance a franchise investment, you’d better start looking elsewhere.

Though the multinational financial services company hasn’t made a public announcement yet, CNBC reported on Friday that Wells Fargo recently sent a letter to customers carrying a personal line of credit notifying them that the product has been discontinued.

The revolving credit lines allowed customers to borrow $3,000 to $100,000 and were advertised as a way to consolidate higher-interest credit card debt or pay for home renovations, but in practice they offered the nearly universal benefit of having a credit line attached to a checking account, protecting customers from expensive overdraft penalties. 

So, what does that mean for franchise buyers? Well, for those who were relying on a personal line of credit from Wells Fargo, the news is obviously a bit of a deal-breaker for any immediate investment plans. The potentially worse effect, however, is that the move could negatively impact customers’ credit scores, making it more difficult for them to find a loan from another provider.

Consumer news site Motley Fool provided an in-depth breakdown of how the discontinued credit lines might impact customers’ credit scores, but in short, borrowers who previously owed a certain percentage on a revolving line of credit now owe 100% of a fixed loan, which is not calculated favorably by credit rating agencies.

From Motley Fool:

Once Wells Fargo closes the accounts (they gave customers 60 days warning), that revolving line of credit disappears. It now appears that a customer who owes $10,000 on a $50,000 revolving line of credit owes $10,000 on a $10,000 loan. So instead of a 20% utilization ratio, they have a 100% utilization ratio.

 

It may work out for customers who are fortunate enough to have other open lines of credit (with zero or low balances). But if the Wells Fargo personal line of credit is someone's sole loan, or they owe more than 30% on other debts, they could see a dip in their FICO® Score.

The discontinuation could therefore hurt franchise investors who previously had a personal line of credit with Wells Fargo even if they were not counting on those lines of credit to finance an investment. 

Wells Fargo has not disclosed how many customers have been impacted by the move, but if you are one of them, it might be time to give your financial advisor a ring.