Why Are Many Banks Closing Lines of Credit?

Another aftershock of the COVID-19 pandemic has been the closure of personal lines of credit. Banks like Wells Fargo have been closing lines of credit and reducing credit card limits. These have been involuntary and disruptive changes for customers.
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However, the economic woes and regulatory changes have prompted big banks to reduce risk and protect their bottom lines. As a result, customers face several consequences, including negative impacts on their credit scores. In addition, they no longer have access to some accounts.

​Why Are Many Banks Closing Lines of Credit?

Some banks are closing personal lines of credit and removing these products altogether. For example, Wells Fargo said it retreated from these products because of the pandemic and Federal Reserve limitations.

The bank was previously involved in a scandal where employees opened fake accounts for customers without their knowledge. The customers did not give the authorization. As a result, the Federal Reserve put limitations on Wells Fargo's growth.

Those limitations include growth restrictions until the bank corrects its compliance deficiencies. Consequently, Wells Fargo has had to offload assets and deposits and cut products. Personal lines of credit were on the chopping block.
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The bank states that instead, it will focus on credit cards and personal loans. However, some customers used the revolving credit lines as overdraft protection to fund home improvements and cover emergency expenses. Now they must look for alternatives. For more information on alternatives, Simple Fast Loans has a list of FAQ’s on lines of credit, personal loans and the loan process in general.

​Credit Cards and Reduced Credit Limits

Beyond the Wells Fargo scandal and ensuing growth limitations, other banks are closing credit cards and reducing card limits. This has been occurring for younger generations more so than older ones. Approximately 56% of younger millennials have had their credit limits reduced.

About 44% of this age group have had credit card accounts closed involuntarily during the pandemic. This is compared to Generation X, whose numbers have been 33% for limit reductions and 21% for involuntary account closures.

Only 8% of Baby Boomers reported a credit limit reduction, and 3% indicated a card was closed without their consent.
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These banks can no longer take as many liberties with extending credit. Accounts are more likely to be closed if they see little use. Extended periods of not using cards can lead to closures and limit reductions.

Why Does an Absence of Activity Trigger Limits and Closures?

When you don't use your card as much or at all, the bank sees this as a signal that you don't need or want the credit. Just like a person tightens their belt by cutting things they don't need a bank will reduce its financial risk by doing the same.

If you're not using as much credit as you have or any at all, the bank sees the open account as an unnecessary liability. Creditors can improve their bottom lines and balance sheets by reducing their potential liabilities. Unfortunately, once this decision is made, the customer has little recourse.
In other words, you're unlikely to get the creditor to reopen your account or bump your limit back up. You have to seek another bank or creditor willing to let you open an account.
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Your other alternative is to look for other financial products or ones that can serve the same purpose. For example, say you want overdraft protection for your checking account. But your bank closes the line of credit that serves as protection. Change to a bank that doesn't charge overdraft fees.

Customer Impacts

Besides losing access to a personal line of credit, customers must deal with other negative impacts. The most serious one hits their credit scores. Having accounts closed and limits reduced both impact a person's credit score.

That's because these actions reduce a person's revolving credit. Having less available credit means it's more likely your utilization rate will go up. Your utilization rate is how much credit you're using compared to how much you have available.

The higher your utilization rate, the lower your credit score can be. Even though your rate of use is only one of the things that go into your score, a higher rate means you're a bigger risk.
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But when accounts are closed or limited further through no fault of your own, you suddenly become a higher risk. You probably haven't changed your habits, like being a good borrower and using credit wisely.

Alternatives Customers Can Seek

Those impacted by credit limit reductions and account closures can turn to alternative financial products. For example, checking account overdrafts can sometimes be covered by a linked savings account. Check with your bank to see if this is an option and do it.

Then, maintain enough balance to cover any overdrafts and waive overdraft fees. You can also switch your checking account to a bank that doesn't charge overdraft fees (even without a linked backup). 
Credit cards may be an excellent way to pay for emergencies and unexpected purchases. However, personal loans are another way to go. Some creditors have revolving personal loan options you can borrow against when you need to. Others are one-time deals.
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So, you can borrow what you need for an emergency, a home repair or renovation, or to cover an expense you'd rather pay in increments over time.  Revolving personal loans are a way to boost your credit score with on-time payments and proper use.

​Final Thoughts

Wondering why many banks are closing lines of credit? Most are concerned with growth limitations imposed by federal regulations and the need to reduce risk. In addition, the pandemic has ushered in economic uncertainty and financial losses for businesses.
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Banks and creditors usually look to reduce risk during times like these. Getting rid of overlapping or duplicate products is one way. Another is to look at customers that aren't using available credit and reduce or cut it off.