For most people, having a bank account is a necessity. A bank account protects your money from theft and fire, allows you to conveniently pay bills via check or online bill pay, and can even help you save money.
But for people with bad credit, opening a bank account – whether it’s a checking account or savings – can be tough.
Many financial institutions deny account applications from people with bad credit – but perhaps not for the obvious reasons. Read on to learn more about how banks use credit to evaluate potential account holders and what to do if your application is denied.
If you’ve had trouble managing money in the past, you may be denied when you try to open a bank account. But the rejection typically won’t be due to your credit report or credit score. Instead, it comes from a checking account consumer report.
Typically, this report comes from one of four major companies that track checking account-related information: ChexSystems, Early Warning System, Telecheck, or Certegy.
These companies are similar to credit reporting bureaus like Experian, TransUnion, and Equifax, but they keep track of deposit accounts with banks and credit unions instead of credit cards and loans.
When you apply for a bank account, the bank uses your name and Social Security number to conduct a routine financial background check, which involves taking a look at your consumer report. If your report reveals any negative banking history, the bank may deny your application.
Some common negative items that might appear on a consumer report include:
Every bank has its own policies for evaluating the information contained in an applicant’s consumer report. But if your report reveals several negative items, especially if those negative items are recent, your application may be rejected.
Do you have bad credit, but no history of trouble with bank accounts? You’re not necessarily in the clear. Most banks don’t check your regular credit report, but some do. When they do, the credit check usually results in a hard inquiry on your credit report, which can further lower your score, at least in the short-term.
If you’ve had an account application rejected because of your consumer report, it’s a good idea to get your hands on a copy. Find out which checking account reporting agency the financial institution used to order your consumer report.
Under the Fair and Accurate Credit Transaction Act (FACTA), you can request a free copy of your consumer report once every 12 months. You can also get a free copy any time a bank refuses to let you open an account due to information found on your report.
Following are links for instructions on ordering your consumer report from each of the agencies:
Once you receive your copy of the report, review it for errors. If you notice any incorrect information, you can dispute the error by submitting a dispute. The Consumer Financial Protection Bureau (CFPB) recommends filing your dispute with both the reporting agency and the financial institution. It even provides sample letters in its Consumer Guide to Checking Account Denials.
Once you submit a dispute, the reporting agency should contact the financial institution to initiate an investigation. Investigations are usually completed within 30 days. The reporting agency will notify you of the results of the investigation by mail.
If you find negative information on your consumer report, the CFPB also recommends you check your credit report, especially if it appears the inaccurate information is the result of identity theft. If there is identity theft on your credit report, you should dispute those items with the credit bureaus and the appropriate financial institutions, as well as file a report with the Federal Trade Commission.
If negative information on your report is correct, try contacting the reporting banks to see if you can resolve your issues. If you owe the bank money – for example, for an overdrawn account – you may need to pay off the debt or negotiate with the bank to settle for less than what you owe.
But keep in mind, paying off or negotiating down the balance won’t necessarily mean the negative item will be removed from your report. Financial institutions are required to advise the reporting agencies that you’ve paid off your debt, but the negative item may remain on your account for up to seven years.
If your application for a bank account is initially denied, you might try asking the bank to reconsider. If your missteps were due to extenuating circumstances and you’re in a better situation now, the bank may allow you to open an account.
If that doesn’t work, your next option is to apply with a bank that either doesn’t review consumer reports or is willing to look past some negative information on your report. Some banks refer to this as “second chance banking.”
According to Experian, some national banks that offer second-chance banking include:
Experian also recommends calling local banks and credit unions to discuss your options.
Second chance banking refers to checking and prepaid accounts that are specifically designed for consumers who’ve had trouble managing checking accounts in the past.
Typically, these are stripped-down versions of a regular bank account. They usually lack perks like overdraft protection and the ability to earn interest, and they may come with more fees than more traditional bank account options.
__Before you open an account, be sure you understand the requirements and fees involved. __
Some of these accounts have a monthly maintenance fee and minimum balance requirements. Others don’t issue checks to account holders. Others charge a fee if you have more than a pre-determined number of transactions per month. Make sure you read the fine print before applying.
If you’ve had trouble managing a bank account in the past and are ready to try again, get a copy of your checking account consumer report so you know what you’re dealing with and have a chance to clean up any errors before you apply.
Negative information doesn’t have to hold you back from the convenience of banking. Shop around for a bank that doesn’t check credit or caters to people that need a second chance. The right account can help you manage your spending and avoid overdrafts. And if you manage the account well, you may be able to convert your second chance checking into an account with better features and lower fees later on.
Janet Berry-Johnson is a Certified Public Accountant and freelance writer with a background in accounting and insurance. Her writing has appeared in Forbes, Freshbooks, The Penny Hoarder, and several other major outlets.