Wells Fargo just closed all personal lines of credit and credit scores will be affected.
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DISCLOSURE: I used to invest in Wells Fargo for their dividends but I have since sold my stocks because of all the bad business practices they were involved in and all the scandals they’ve been through. In 2016 they were caught creating 1.5 million fake accounts and more than 500,000 credit cards, they failed the living will test which is a strategy all banks need to have in case of bankruptcy, they created another 3.5 million fake accounts, they preyed on low income people trying to sell their loans and then foreclosed on 400 homes because of a computer glitch, they paid out 2.1 billion for their role in the mortgage crisis, and they sold their customers overly expensive mutual funds because it made them commission.
WHAT HAPPENED?
Wells Fargo gave their customers 60 days before closing their personal lines of credit. This is really interesting because Wells Fargo makes a lot of money on these kinds of products, the interest rate they charge customers varies anywhere between 9.5% to a whopping 21% which is huge, that’s roughly three times what the S&P500 returns in a year. Once accounts are shut down, people will still be expected to pay the minimum payment.
WHO THIS AFFECTS AND HOW?
This affects anyone who is a customer using their product. The biggest impact is utilization which looks at the amount of credit you use every month in relation to how much credit you have available. So if you have $1,000 in credit available to you and you use $1,000 every month, your utilization is 100%, that’s not good and your credit score will take a hit. This is a big one because credit utilization accounts for 30% of your entire credit score.
WHY ARE THEY DOING THIS?
Ever since they’ve been exposed for their unethical business practices, in 2018 the federal reserve limited Wells Fargo’s size. They put a limitation on them with what’s called an asset cap which gives the bank a hard limit on how many assets under control they could have. The limit they gave them was $1.95 trillion dollars. While other banks were making money from the central banks, Wells Fargo had to sit on the sidelines.
THE THEORY
Some people see this as the beginning of the credit crunch that banks are about to have. The theory is that closing these accounts is actually their way of raising money and getting some liquidity because perhaps they know something we don’t about what’s going to happen in the near future. It’s no secret that we’re seeing a lot of leverage in the markets, especially in the crypto markets where there’s no regulation and people can borrow 10x on their deposits and this is because we’re all expecting inflation. Maybe banks are hedging their bets because they are afraid of what will happen if that inflation doesn’t come and instead we get deflation.
MY THOUGHTS:
Banks are flooded with cash right now, they have so much money they don’t need to raise liquidity. The Fed now has more than a third of the US total GDP. Over 8 trillion dollars. You can actually see this chart play out in the reverse repo markets which has gone parabolic since April - we are now up to 780 billion dollars. What does that mean? This is where the Federal Reserve or central bank sells treasury bonds and other very safe investments to other banks in exchange for cash. This drains money out of the system because the non central banks park their cash in exchange for a small yield. This is a good thing because it gives us a way to balance out the QE or quantitive easing which is where we print money.
*None of this is meant to be construed as investment advice, it's for entertainment purposes only. Links above include affiliate commission or referrals. I'm part of an affiliate network and I receive compensation from partnering websites. The video is accurate as of the posting date but may not be accurate in the future.
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