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It’s said that credit rules the world. A line of credit can be a useful piece of your financial plan. But, it can be taken away at any time for no reason at all. So don’t let credit rule your personal finances.
In this week’s episode, the guys discuss Wells Fargo shutting down all personal lines of credit for their customers. And how a line of credit should fit into an overall financial plan.
They also hit on whether or not folks should use investment gains as justification for large purchases.
Be sure to check this one out!
Show Notes
Well Fargo Tells Customers It’s Shuttering All Personal Lines of Credit – CNBC
Borrowing Is Back as Sign-Ups For Auto Loans, Credit Cards Hit Records – Wall Street Journal
Average Credit Card Interest Rate
What To Do When Your Bank Cancels Your Line of Credit – Full Transcript
**For a downloadable PDF version of this transcript, click here**
Casey Mullooly: Welcome to the Mullooly Asset Podcast. This is episode 364. We’re welcoming back Brendan this week after a couple of week absence. Glad to have you back.
Brendan Mullooly: Yeah. Happy to be here.
Casey Mullooly: This is Casey Mullooly. I’m here, as usual with Tom Mullooly.
Tom Mullooly: Hello there.
Casey Mullooly: Let’s get into it.
Brendan Mullooly: The broader lesson there is like people rely on things like lines of credit in many variations as part of their personal finances and just like caution on that, because this can happen for any reason at any time. You are subject to whatever the bank says. 60 day notice. Good luck.
Tom Mullooly: Yeah. That’s part of your safety net.
Brendan Mullooly: Yeah.
Tom Mullooly: That’s not a safety net.
Brendan Mullooly: It can be part of it.
Tom Mullooly: Yeah.
Brendan Mullooly: But it can’t be…
Tom Mullooly: All of it.
Brendan Mullooly: … the crux of it. Yeah.
Tom Mullooly: And we’ve had people who have come into the office in years past who were like, well, I have like a $10,000 [crosstalk 00:00:56]
Brendan Mullooly: I have no money in the bank, but I have a HELOC. So it’s cool. It’s like, is it though?
Tom Mullooly: Yeah. I remember what happened in 2007 and eight.
Brendan Mullooly: Yeah.
Tom Mullooly: Like that stuff got shut down pretty fast.
Casey Mullooly: So just to intro the article, we’re talking about a pretty big news headline that just came out today on the day we’re recording this, that Wells Fargo tells its customers it’s shuttering all personal lines of credit. So like Brendan said, customers now have 60 days, and after that, their accounts will be shuttered with balances requiring minimum payments at a fixed rate.
Tom Mullooly: One of the things that I saw on Twitter as people were commenting on this headline was a lot of folks who have received letters in the last few days from Wells Fargo notifying them. And Wells Fargo also threw in the line that closed accounts may impact your credit score or your credit rating. Oh.Oh.
Brendan Mullooly: You know what people are probably going to do? It’s nice. That’s nice. Thanks.
Tom Mullooly: Thanks for that. One little more…
Brendan Mullooly: Thanks for that, Wells Fargo.
Tom Mullooly: … kick in the butt on your way out.
Brendan Mullooly: I feel like people are just going to pick up from Wells Fargo and go to like JP Morgan Chase and open the exact same kind of an account and take what they’re willing to lend them to close this out before it impacts their credit score. Or, I mean, I guess it still would rather, but rather than make minimum payments or something, if you’re in a position to do so. You’re just going to go to a different bank who’s going to continue this kind of lending, assuming they are going to continue this kind of lending.
Tom Mullooly: I think the thing that’s really making me scratch my head is that we keep reading articles about how banks are starting to open up and do more lending. And it seems like this bank is choosing to go in the opposite direction. I don’t understand that.
Casey Mullooly: One of my takeaways was this has to be related to the sanctions imposed on them from the fake accounts scandal back in 2018, 2019.
Tom Mullooly: Yeah.
Brendan Mullooly: They already pulled back last year on home equity lines of credit. They’ve left some of the auto lending space that they used to be in. So it seems like they’re cutting some of these areas that are maybe not as profitable for them or riskier as they decide what they can and can’t do as a result of the sanction to kind of agree with that case.
Tom Mullooly: And home equity and auto loans is a huge market for Wells Fargo or has been in the past. But yeah, they got out of that last year.
Casey Mullooly: So I actually did some digging because the article said that the move would let the bank focus on credit cards and personal loans. So according to CreditCards.com and the Wells Fargo website, Wells Fargo is only offering three credit cards on their website now, which doesn’t seem like a lot.
Tom Mullooly: And there’s like 19 from Citibank.
Casey Mullooly: Right. So the lines of credit that Wells is no longer offering to their clients. The rates on those range from nine and a half percent to 21%, but they were variable. So there was some wiggle room in there, but according to CreditCards.com, the average APR on credit card offers rose to a one year high at just over 16%.
Brendan Mullooly: The only rate that will never ever go down no matter what the fed does to interest rates, credit cards.
Tom Mullooly: Got to…
Brendan Mullooly: Best of luck with that.
Tom Mullooly: You have to pay for shrinkage and for people who crap out on their loans.
Brendan Mullooly: Yeah.
Tom Mullooly: That’s why it’s 16%.
Casey Mullooly: But to your point, Brendan, I feel like they’re getting out of this space because it’s not as profitable as focusing more on credit cards. So another strike against Wells Fargo.
Brendan Mullooly: Yeah.
Casey Mullooly: Like you said, you got to be careful with these products from banks because, poof, they can just go away.
Brendan Mullooly: Yeah. If you were relying on a line of credit from Wells as something to backstop your personal finances, I mean, I hope that it was just a part and not your emergency fund.
Tom Mullooly: So along the same lines, we’ve had some folks tell us that, well, they have a credit card from Home Depot or they have a credit card from some other store, and actually what you have is a branded credit card from Chase or Wells Fargo or some other bank. They’re the bank that’s doing this through Home Depot or some other department store or something like that. And I mean, those rates are, I mean, they can go up to 29.
Brendan Mullooly: Yeah.
Tom Mullooly: That’s insane. But I don’t know if that’s part of the business that they’re stepping back from. That wasn’t clear, but it just seems like Wells Fargo is deciding to streamline their business and simplify things.
Brendan Mullooly: Right.
Casey Mullooly: And it could be due to another change in trend, which was highlighted in a Wall Street Journal article over and on the very same day with a headline, Borrowing is Back As Signups for Auto Loans Credit Cards Hit Records. The first line of the article is, Americans are borrowing again, in some cases at levels, not seen in more than a decade. So it goes on to say that consumer demand for auto loans, general purpose credit cards, and personal loans was up 39% in April compared with the same period last year. And it was up 11% compared with the same period in 2019.
Tom Mullooly: Yeah. I think it’s kind of hard to measure anything against numbers from last year, because last year was so screwy, but that 11% from two years ago
Brendan Mullooly: But even that’s not, I mean, depending on how they’re measuring this, if this is just… What is the number? It’s…
Casey Mullooly: 11% from 2019.
Brendan Mullooly: Right. But we’re still talking about a period of time where there’s like excess demand in the system, and 2019 was just a regular year. It wasn’t coming off of a year where they’re like…
Casey Mullooly: True.
Brendan Mullooly: I get that compared to 2020, it’s obviously misleading because people were just not really doing stuff at this point in 2020. So that’s off, but compared to 2019 too, it’s still going to be higher than that. Because, again, it was a normal year and we don’t have people lining up to take vacations they postponed for 12 months or buying a car because they’re actually driving again.
Tom Mullooly: I think another part of the skew that comes comparing 2020 this year is in April, May, June period last year, in the second quarter, a lot of banks were cutting credit lines and shutting down lending practices because they knew that people were getting laid off in droves. So they didn’t want to be making loans. And so that’s part of the bounce back, I guess.
Brendan Mullooly: I’m just suspicious of like fun with numbers here, because I think that anytime you can take a data point and say, this is the highest since bum bum bum bum, the financial crisis. It’s like, is this the beginning of the next one?
Tom Mullooly: Yeah.
Brendan Mullooly: I don’t know. Keep reading to find out. It just seems like a little, I understand they need to suck people in, but I don’t know that it’s overly concerning. I just, I think that if you consider pent up demand, I think that this will probably come and go in terms of, yeah, people are spending to do stuff that they probably just didn’t do last year. And so you’re getting maybe two full years of demand squeezed into like the last couple of months is maybe the beginning of it. And it probably fades out at some point in the future too.
Casey Mullooly: Yeah. Especially March, April, May of this year was when vaccinations were rolling out strong and everyone was kind of raring to go. And there was this pent up demand.
Brendan Mullooly: It was still unclear at that point just a few months ago.
Casey Mullooly: Right. We were just coming… Like we’re recording this in early July.
Brendan Mullooly: Yeah.
Casey Mullooly: So now let’s see what it looks like in November, like October, November, December. Brendan Mullooly: Yeah. And next year.
Casey Mullooly: Yeah. Exactly.
Brendan Mullooly: Right? I think, we’re going to have a lot of data points that you can torture to say things look weird or this is the first time since X, but I’m not sure that the historical comparisons are great here because I don’t think we’ve had any years in the past where we had a year where there was just down consumption the way that we had in 2020.
Casey Mullooly: So an interesting line from the Wall Street Journal article was from a man that they interviewed in Minnesota. And I just wanted to get your guys’ take on this. I’m paraphrasing here, but the man said the growth over the last year in my investment account has given me the peace of mind to spend some money taking on a nice luxury car. I think it was a Lexus. He said I can’t take the money with me in my investment accounts. So I might as well enjoy a nice car while I’m at it.
Tom Mullooly: Yeah. I saw that. It’s a shame. I’m going to get a little picky here, but he took a $31,000 loan to buy a five-year-old car. Not the way I would do it, but…
Casey Mullooly: But is that representative of the times we’re in in terms of the way investment accounts have done? I’m not trying to pigeon hole you guys into an answer here, but is this reckless behavior or is this a guy spending his well-earned money in a way that he wants and is going to enjoy?
Brendan Mullooly: On one hand, I like the idea of people enjoying their money if they’re in a position to do so. So like maybe not enough information to say for sure in this case whether it makes sense. However, I would consider, you have a period of time where, yes, your investments have done pretty well over the last 12, 18 months, let’s call it, and maybe even longer than that. But so investments have done well. That is somewhat fleeting in the sense that that’s always going to be changing. However, the new debt payment that you just took on for the $31,000 car loan is fixed. You’re going to make that no matter what.
Brendan Mullooly: And so you’ve got to become, if you’re going to expand that payment in terms of I’m going to borrow more because I feel financially because of gains that I have that I’m going to I’m in a position to do so and treat myself, so to speak. Those payments are permanent. The investment performance six, 12 months from now, you might feel differently about. And so I wouldn’t make decisions about obligations now that you have over five or seven years, like a car payment, based on investment performance, which is going to change a ton over time. We’re going to go through periods of no returns or down returns. And you’re still going to have to make that car payment.
Casey Mullooly: You’re also not paying your car loan with money from your investment account.
Brendan Mullooly: Yeah. Probably not. Right?
Tom Mullooly: Right.
Brendan Mullooly: Yeah.
Tom Mullooly: You’re not taking it from there.
Casey Mullooly: So it’s more of like a cashflow issue than it is being backstopped by your investment accounts.
Tom Mullooly: This also kind of ties in with something that I mentioned an episode or two ago where I think everyone has been compliant for the past 14, 15, 16 months with lockdown rules and masks and all this other stuff. And people haven’t been able to go on vacation, haven’t been able to really do things that they want to do. And so, yeah, there should be an expectation that this is going to happen.
Tom Mullooly: That it’s hard to get a rental car when you go on vacation. It’s hard to book a flight to some really popular places for now. I think that people shouldn’t be treated like children in terms of what they can and can’t do. They won’t be that compliant for long. The fact that people didn’t freak out more towards the end of this pandemic is honestly amazing. And I just think that there’s going to be a certain amount of we’re going to overdo it a little bit, but I think people are for the most part responsible, and they’re going to say, okay, we got that out of our system. Or we had two vacations this year because we didn’t have one last year.
Brendan Mullooly: What I’m saying though is that they can’t take it back when you do it this way. Like you financed a car. You can’t shrink that back down when you realize that you…
Tom Mullooly: That’s an obligation.
Brendan Mullooly: Because I agree. It’s like, eventually you’re going to realize, Hey, I overdid that, but that’s a payment you have to make forever now until the debt is retired. So I don’t know that, like, I wouldn’t make a decision like that with lasting impacts as my way to splurge. Like if you’re going to splurge on a vacation, that’s a one-time expense and you can say in hindsight, we overdid it, but we had really fun times on that trip.
Tom Mullooly: We had a great time. Yeah.
Brendan Mullooly: That was cool.
Tom Mullooly: Yeah.
Brendan Mullooly: You’re not paying for that vacation for the next five or seven years. Like a car, I don’t know, again, I don’t know this guy’s situation. Maybe he can afford it, but I’m just saying investment performance should not impact things like taking on debt.
Tom Mullooly: Your spending decisions.
Brendan Mullooly: Yeah. Or they can to a degree, but not, I don’t know. I wouldn’t use that as like a, because of this now I’m doing that sort of thing. I don’t know that that tracks for me.
Tom Mullooly: Yeah.
Casey Mullooly: All right. I think that’s going to do it for episode 364 of the Mullooly Asset Podcast. Thanks for tuning in and we’ll see you on 365.
Speaker 4: Tom Mullooly is an investment advisor representative with Mullooly asset management. All opinions expressed by Tom and his podcast guests are solely their own opinions and do not necessarily reflect the opinions of Mullooly Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of Mullooly Asset Management may maintain positions in securities discussed in this podcast.