When you apply for a checking account, financial institutions often use a system called ChexSystems to evaluate your banking history. If you've been denied, it's likely due to negative information on your ChexSystems report. How does ChexSystems know your banking history and what are the reasons they use to review your banking history?
Reasons Why You Might Be Denied a Checking Account and How to Fix It
Multiple Account Openings and Closings
Regularly opening and closing accounts can have a detrimental effect on your ChexSystems score. Financial institutions interpret such actions as warning signs of potential financial instability or fraudulent behavior. Banks and credit unions prefer clients who demonstrate a commitment to lasting partnerships. Frequent account switching may suggest an attempt to evade fees or other account-related problems, such as overdraft fees or debts. Banks are cautious about customers who have multiple account openings and closings.
It's important to keep your accounts open for a good amount of time to show the banking institutions that your finances are stable. If you must close an account, ensure there are no outstanding balances or fees when you do. When opening a new account, it is essential to provide reasons for any history of opening and closing multiple accounts if asked.
Multiple Overdrafts
An overdraft happens when you spend more money than you have in your checking account.
Here are some common ways overdrafts can occur:
Checks:Â Writing a check for an amount greater than your balance.
Recurring payments:Â Automatic bill payments or subscriptions that deplete your account.
Electronic transfers:Â Sending money electronically when you don't have sufficient funds.
Having numerous overdrafts can greatly harm your ChexSystems score. ChexSystems assesses the frequency, amount, and timing of these overdrafts. The higher the frequency of overdrafts, the more detrimental it appears on your record. Larger overdrafts can have a more significant effect than smaller ones. Ultimately, recent overdrafts will have a greater impact on your score compared to older ones.
To avoid overdrafts, it's crucial to track your spending, balance your checkbook regularly, and consider using your bank's overdraft protection options.
See my feature in BestLife 5 Reasons You Shouldn't Get a Joint Bank Account With Your Partner
Unpaid Fees
Depending on the type of bank you have, you may be charged certain fees. If you don't pay these fees, your ChexSystems score can decrease significantly. Some banks have monthly maintenance fees if you don't maintain the minimum balance. There are also overdraft fees, returned check fees, and more. Here are a few of the most common fees that you may be subject to:
Bank Account Fees:
Monthly maintenance fee:Â A regular charge for simply having an account.
Minimum balance fee:Â A fee charged if your account balance falls below a certain amount.
Overdraft fee:Â Charged when you spend more money than you have in your account.
Returned check fee:Â Charged when a check you write bounces.
ATM fees:Â Charged for using an ATM.
Wire transfer fee:Â Charged for sending or receiving money electronically.
Foreign transaction fee:Â Charged for using your debit or credit card outside of your country.
Inactivity fee:Â Charged if your account has no activity for a certain period.
When you choose a bank, it's important to compare fees. Some banks offer free checking accounts if you maintain a minimum balance or sign up for direct deposit.
Fraudulent Activity
Fraudulent activity on your bank account can have a devastating impact on your ChexSystems score. Even if you're not responsible for the fraud, it can still negatively affect your report.
You may not realize it, but banks monitor your account patterns and receive flags or notifications when unusual activity is identified. Large or frequent transactions that deviate from your normal spending habits can trigger an alert. You may have received a notification from your bank verifying whether you completed an unusual transaction due to it veering from your normal patterns or if it doesn't align with the income you provided when opening your account.
Any history of fraud associated with your bank accounts will likely result in the denial of a new account. So, it's important to report any suspicious activity to your bank immediately. The quicker you report it, the better your chances of mitigating the damage to your ChexSystems score.
See my Nasdaq feature 10 Steps to Finding a Better Bank
Understanding Your ChexSystems Score
A ChexSystems score is a numerical representation of your banking history. It's used by financial institutions to assess your risk as a customer. Unlike a credit score, which focuses on loan repayment, a ChexSystems score focuses on your checking account history. The ChexSystems score ranges from 100 to 899. A higher score indicates a lower risk to the bank. A score of 9999 is an indication that there is insufficient information in ChexSystems files to create a consumer score. Basically, it means that you don't have any negative hits on your bank accounts.
ChexSystems Score Interpretation
Each bank has its own criteria for determining acceptable score ranges. However, generally speaking:
Scores below 600:Â Indicate a higher risk profile and could limit your options for opening new accounts.
Scores between 600 and 700: Indicate a moderate risk, and you might encounter some restrictions or higher fees.
Scores above 700:Â Indicate a lower risk, and you're likely to qualify for standard checking accounts.
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Improving Your ChexSystems Score
If you've been denied a checking account due to a negative ChexSystems report, you can take the following steps to improve your score:
Dispute Errors:Â Review your ChexSystems report for inaccuracies and dispute any errors you find with the banking institution.
Pay Off Your Banking Debts:Â Resolve any outstanding debts related to your bank accounts.
Build Positive History:Â Open a second-chance checking account or prepaid debit card to establish a positive banking history.
Consider Alternatives: Explore alternative financial services, such as prepaid debit cards or credit unions, that may have less stringent requirements.
Do you find managing your finances challenging? Book a complimentary consultation to discover the benefits of financial counseling.
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