Exactly What Is ChexSystems?

ChexSystems is a consumer reporting agency that provides information to banks and other financial institutions about the banking history of its potential customers. 

ChexSystems maintains an enormous database of information on consumers who have had bank accounts closed due to mismanagement or who have a history of bounced checks or other banking problems.

How ChexSystems works is when someone applies for a new bank account, the bank can instantly check ChexSystems to see if the applicant has a history of financial mismanagement. 

Pulling a ChexSystems report can affect the bank’s decision to approve or deny the application for a bank account.

Negative Banking Activity That Can Appear In ChexSystems Reports:

• Bounced checks
• Overdrafts
• Involuntary closure of accounts
• Negative balances
• Abuse
• Fraud
• Identity theft
• Number of bank account applications

But be aware that ChexSystems is not the only consumer reporting agency that may contain negative banking activity. Here are two additional agencies that collect and maintain consumer banking history:

Early Warning Services (EWS)

Early Warning Services (EWS) is a private financial services company owned by seven major banks that include Bank of America, BB&T (now Truist), Capital One, JPMorgan Chase, PNC Bank, US Bank, and Wells Fargo.

EWS provides fraud prevention, risk management, and payment processing solutions to financial institutions, government entities, and businesses.

Negative EWS records can prevent you from opening a bank account just like ChexSystems.

Telecheck

TeleCheck is a payment processing company that provides check verification and guarantee services to merchants, businesses, and other organizations. 

When a customer writes a check, TeleCheck verifies the customer’s information, including their identity and bank account information, to ensure that the check is valid and can be processed.

There are some credit unions that pull a Telecheck report to issue checks when you apply for a checking account.

What To Do When Reported To ChexSystems?

Being reported to ChexSystems could mean you are prohibited from opening a bank account online or in person. Take steps to get removed from ChexSystems if you discover errors.

You have a right to dispute both ChexSystems and the bank that reported the account if you believe an item on your ChexSystems report is inaccurate. The Fair Credit Reporting Act requires ChexSystems and the bank to adhere to investigation requirements for any disputed item. Inaccurate items must be removed.

ChexSystems disputes are just like credit disputes in that you must take the same steps to remove negative records.

How Far Back Does ChexSystems Go?

Once you land in ChexSystems that negative notation remains for 5 years from the date the bank reported you. Although the Fair Credit Reporting Act allows ChexSystems to keep records for up to seven years, the agency only keeps them for five. 

Do Banks Run Credit Reports?

Banks typically do not run credit reports to open checking accounts unless it’s to verify your identity. When you open a checking account, the bank will usually ask you to provide identification, such as a driver’s license, and may also ask for your Social Security number.

The bank may then use this information to verify your identity using a credit bureau like Experian, Transunion or Equifax.

Having bad credit may not necessarily prevent you from opening a new bank account. But if you were to apply for overdraft protection, your credit history may be considered.

Banks That Don’t Use ChexSystems vs. Second Chance Banking

Here is a quick look at differences in a Non-ChexSystems vs. second chance bank accounts.

Banks that don’t use ChexSystems

• Non-ChexSystems banks simply don’t use ChexSystems to verify new accounts – but they may use other consumer reporting agencies such as EWS, Telecheck or a credit check to verify new accounts.
• Customers have very few, if any account restrictions.
• Free monthly checking may be offered.
• Overdraft protection may be offered.
• High daily debit card withdrawal limit.
• High ACH transfer limit per day.
• Unlimited check writing privileges.

Second Chance Banking

• Your ChexSystems report is typically checked.
• When a bank or credit union offers a second chance checking account, they’re willing to overlook a problematic ChexSystems record.
• A monthly service fee is typically required.
• Check writing privileges may be restricted.
• Account is closely watched for the first 12 months.
• Account can be upgraded to regular checking after 12 months if managed well.
• Overdraft protection may not be offered.
• A financial literacy class may be required prior to opening new account.

7 Benefits of banks that don’t use ChexSystems

There are real benefits to having a traditional checking and savings account that banking alternatives like prepaid debit cards or check-cashing services just can’t offer. Here are just a few benefits of banks that don’t use ChexSystems:

• Save on check-cashing fees. Save money over time by not having to use check-cashing services. For example, Walmart charges $4 for cashing checks of up to $1,000.
• Avoid prepaid debit card fees. Avoid the myriad of fees that often come with prepaid debit cards. For example, Netspend’s monthly fee is $9.95 without Pay-Go, the reload fee is up to $3.95, and the ATM withdrawal fee is $2.50. As you can see, there is no way to avoid some kind of fee with prepaid debit cards.
• Keep your money safe. Enjoy a safe and convenient place to stash your cash. It may sound strange, but not everyone saves money in a bank, which could prove dangerous. There have been several stories where people have lost money saved at home during a fire, even when the money was kept in a safe. If you only have a savings account for bad credit that would be better than a mattress or an at-home safe.
• Your money is insured. Have the confidence in knowing your money in banks is FDIC-insured up to $250,000.
• Built-in fraud protection. Purchases made with bank debit cards offer zero liability for fraud.
• Become BFFs with your bank. Establish a relationship with your banker. When you engage in relationship banking your banker may approach you with better offerings on loan rates, insurance, investments, and certificates of deposit.
• Get a mortgage loan. Mortgage lenders require you to provide recent bank statements when applying for a mortgage loan. Prepaid debit cards are not the same as having traditional bank statements.

Best practices to manage checking accounts

It’s difficult to find banks that don’t use ChexSystems, so when you do open a new checking account, carefully manage it in order to keep it open. When you manage your account, you can avoid unnecessary fees, being reported to ChexSystems or Early Warning Services. Here are actions to take for good checking account management:

• Keep track of your balance and any outstanding payments.
• Open and review all bank statements and correspondence.
• Avoid spending more than you have in your account.
• Monitor your account online or on your phone before you withdraw cash at an ATM.
• Check your balance by phone or online before you write a big check or make a big payment.
• Sign up for transaction alerts and low-balance warnings via e-mail or text.
• Don’t assume that the money you deposited is available immediately.
• Find out when the money you deposit will be available for your use.
• If there is a “hold” on a deposit, make sure you know when it will be lifted.
• Avoid making a payment using your checking account unless you know for sure the money is in your account.

Best Banking Practices For People In ChexSystems

Managing a bank account comes with great responsibility, especially when you’ve been reported to ChexSystems.

Once you get to enjoy the freedom to make purchases, pay bills and have peace of mind that your money is safe, it’s still important to be diligent about monitoring your account and avoid risky activity, for example:

• Have more than one banking option. Don’t put all your eggs in one basket. Banks will sometimes conduct ChexSystems sweeps on existing customers. Bank sweeps can close accounts without warning, even if your account is in good standing. It’s dangerous to have all of your money in one place. If a bank closes your account, they can freeze your money up to 30 days. 
• Split direct deposits between two checking accounts. That way you’ll have access to some funds if one of the accounts is frozen or becomes temporarily inaccessible.
• Immediately report any fraudulent activity you may discover on your accounts. “Suspected fraud” and “ChexSystems account abuse” seem to be the go-to reasons banks report customers to ChexSystems and Early Warning Services – even when no such activity occurred.
• Close your account the right way. If you close your account, continue to monitor it for several months to ensure there are no unpaid charges, fees, or overdrafts.