ChexSystems and Bad Check Databases
Running out of money in your checking account causes several problems, including the potential to appear in a list of people who write bad checks. Several databases, including ChexSystems, track your check writing behavior. Eventually, you might have trouble opening a bank account or paying by check with negative records in your history. Most people are familiar with the obvious consequences of bouncing checks:
- Fees: Your bank, and whoever you wrote the check to, charges fees when a check is returned (typically around $35 each). If you are paying something with a due date—like a credit card payment—you also face “late payment” penalties and other complications.
- Credit scores: A bounced check does not immediately damage your credit, but you need to get things cleared up and complete your payment. If you take too long, your creditor (whether it’s a doctor’s office, merchant, or municipal district) might send your account to a collections agency. If that happens, your credit will suffer.
- Account closure: After too many bounced checks, your bank might close your account to minimize risk.
- Paying by check: Merchants and others may refuse to accept checks from you if their check verification systems say that you’re a high-risk customer.
Bad Check Lists
Several consumer reporting companies track your checking account activity. If you overdraw (or go below zero) in your checking account more than just occasionally, those databases can create problems for you. The federal government regulates most of those services under the Fair Credit Reporting Act (FCRA), just like the three major credit reporting agencies. The two main types of transactions that cause trouble are:
ChexSystems is just one of the companies that track your banking behavior. ChexSystems is primarily used by banks and credit unions when evaluating whether or not to open a checking account for you.
Check verification services can also keep records of your check writing activity. Merchants subscribe to services that alert them to potential problems before they accept a check from a customer. In addition to ChexSystems, TeleCheck, Certegy, Early Warning Systems, SCAN, and CrossCheck are popular databases for merchants, banks, and credit unions.
What ChexSystems Does
ChexSystems keeps records on people who spend more money than they had available in their checking accounts, as well as those who violate other bank policies. If you've bounced checks in the past or you owe money to a bank, there's a good chance that you're in the ChexSystems database.
Banks and credit unions provide information about your banking behavior to ChexSystems, and other sources contribute as well. Then, financial institutions buy reports from ChexSystems to find out if you’ve had problems at other banks.
- Negative reports only: The main ChexSystems report only contains negative information. In other words, you have an entry in that report only if you have bounced checks or had overdrafts in your bank accounts. If you don’t appear in a ChexSystems report, that’s a good thing. This is different from credit reports for borrowing, which are better if you can show a long history of borrowing and repaying on time.
- How long do ChexSystems records last? Negative entries appear on your ChexSystems report for five years, or until the bank or credit union that reported the problem asks to have it removed. However, you can dispute any erroneous entries and have them removed by providing sufficient proof of a mistake or identity theft. Banks can update records to show that you no longer have outstanding debts, but the records still remain for five years.
- Who decides if you’re approved? ChexSystems does not determine whether or not you’re allowed to open a bank account. Instead, banks and credit unions make that decision based on their policies. ChexSystems provides the information to financial institutions, and you’ll have better luck if your ChexSystems report is clean.
Request Scores and Reports
As with all consumer reporting agencies, ChexSystems is required to provide you with a free copy of your report each year, free of charge. For details on ordering a report, visit the ChexSystems website. ChexSystems also creates a Consumer Score, which is a number designed to predict your future behavior. You can also order your score, which is available at no charge as of this writing (but consumer reporting companies are allowed to charge fees for scores). You have the right to order free reports from other check verification services and databases as well.
If your ChexSystems report is making it hard to open an account, you’ll need to find a bank or credit union that is willing to work with you.
- No checking: Not all banks use ChexSystems reports. Find one, and they won’t turn you away based on the contents of those reports. Small local banks and credit unions are your best bet.
- Make an exception: Sometimes it’s possible to plead your case. Explain what happened with your checking accounts in the past and why you don’t expect the same things to happen in the future. Again, your chances are best with a small institution.
- Second chances: Some banks, by policy, are happy to open accounts for people on bad check lists. Known as “second chance accounts,” these institutions give you less freedom to spend, but at least you can sign up for direct deposit, store funds, and earn interest. Over time you can work your way back to a fully-functional bank account.
Stop Bouncing Checks
To avoid problems in the future:
- Keep a safety cushion of cash in your checking account.
- Start balancing your checkbook regularly.
- See if alternative payment methods work any better. For example, a debit card will be rejected immediately if you have insufficient funds in your account.
- Sign up for alerts so you know when your account balance is running low.