Consumerism Commentary reader Yana wrote in yesterday to let me know about some changes in the terms for Wells Fargo’s Direct Deposit Advance service. At first, I was surprised that this service exists. At its core, the credit product offered by Wells Fargo is basically a payday loan, though it comes from a reputable financial institution rather than a shady operation — or shadier, depending on your opinion of financial institutions.
My surprise faded quickly. Wells Fargo’s service is fairly low-risk from the bank’s perspective, particularly when compared with typical payday loans. Companies that pay salaries through direct deposits from companies are generally more reliable than customers who need to show up with their next paycheck. Those who use this service are already customers of the bank and have gone through any necessary background checks. Yet, the bank can still charge over-sized fees, just like payday loan companies. In Wells Fargo’s case, the fee is $2 for every $20 borrowed.
Even within Wells Fargo’s own list of frequently asked questions about the Direct Deposit Advance service, the bank warns customers that the product isn’t right for all customers:
It is important to note the Direct Deposit Advance service is a relatively expensive line of credit intended to assist with short-term borrowing needs and is not recommended as a solution for your long-term financial needs. Alternative forms of credit may be less expensive and more suitable to your long-term financial needs.
If the bank is steering you away from its own product, it’s best to stay away. Tellers might recommend this product to customers who come to the window without any warnings about price, however, and customers who are worried about being able to pay their bills might not be looking online for more information about the product before signing up.
The terms of the Direct Deposit Advance service have changed to further keep customers off the program. Habitual borrowers will find that their credit limit will gradually decrease if they continue to use the service, to the point at which borrowing against a future deposit will be prohibited for a period of time.
Gradually reducing a credit line could be an effective way to move people off of credit, but it could make living difficult for any household that has grown accustomed to having the credit available. A better solution might be counseling with a qualified individual who can help look at the household expenses and develop a plan for rising above paycheck-to-paycheck living.
What do you think of Well Fargo’s plan to gradually ween habitual users of the Direct Deposit Service off this expensive credit product?
Updated March 7, 2012 and originally published December 22, 2010.