Opening a new checking account isn’t as simple as bringing some cash to the bank and making a deposit.
Banks and credit unions want to learn about your financial past before establishing an account with you, and they do this by running a bank history report on you, says Kimberly Allen, a certified credit counselor in Williamsburg, Va. This report is different from a credit check, she says.
“The bank history is an indicator of how the client will handle bank accounts in the future,” Allen says.
If the report shows that a potential client has a record of mismanaging his or her past checking privileges, the new financial institution will take it into consideration and could refuse to open a new account, she says.
Gregory Meyer, a spokesman for Meriwest Credit Union in San Jose, Calif., says banks check to see if a past account was “closed for cause,” meaning the bank or credit union shut down the checking account because of an account problem. Here’s how they work.
Your banking history
Generally, “cause” issues stem from insufficient funds fees that weren’t paid, a history of writing bad checks to merchants that weren’t paid, or fraud, Meyer says.
“A record means another bank felt it prudent to close an account either to avoid a loss or stop current losses from increasing,” he says.
Financial companies access data from account verification services, says John Ulzheimer, president of consumer education at SmartCredit.com. “Bank history information is voluntarily reported to database clearinghouses that serve member banks,” he says.
The most well-known verification service is ChexSystems in Woodbury, Minn., he says. When a potential client applies to open a new checking account, a search is made against the service’s database to see if any problems are reported, Ulzheimer says.
The data are collected under the requirements of the federal Fair Credit Reporting Act, and consumers are allowed access to the information by law. Applicants can ask for the name of the verification service used when they apply for a checking account, Ulzheimer says.
Allen says when a report is run, it may not come back with a record. In fact, the goal is not to have a record.
There is either nothing to show, which is a good sign, or there is an item that has been reported by a financial institution or a merchant, which is not good, Allen says.
Meyer says if there is a record, the information is straightforward. “It gives the date the account was closed and also indicates whether any money was owed to the institution,” he says.
The name of the institution also is included in the report. However, additional information surrounding the account closure, such as how much money was owed to the bank or any special circumstances, are usually not included, Meyer says.
Past banking records aren’t the only information a bank or credit union will research before deciding whether to open a checking account, Meyer says. Institutions also are likely to check your credit report, which would reveal if there is any bankruptcy, fraud or identity theft on the applicant’s report.
The problems are often related, Ulzheimer says. If someone writes a lot of checks to pay bills but the checks are returned for insufficient funds, chances are those bills will be sent to collection agencies and eventually show up on the applicant’s credit report.
When a record is found, the process of opening a checking account usually stops and the person is turned away with a disclosure, explaining why the institution cannot open their account, Meyer says.
A second chance
Some banks have second chance programs, which offer restricted account access during a probationary period, Ulzheimer says. These accounts generally have higher fees and more limitations, he says. For example, a consumer may be able to open an account but may not be issued a debit card, he says.
A second chance program can be a good option for people who are unable to open a traditional checking account, but it’s important to make sure the financial institution is reputable, he says. Stick with a bank that’s insured by the Federal Deposit Insurance Corp. or a credit union that’s insured by the National Credit Union Administration.
“Another option would be to open a savings account and build a relationship with the financial institution while paying back outstanding items,” credit counselor Allen says.
Some banks also may require customers to participate in a financial management workshop before they can open a second chance account, she says.
According to Ulzheimer, that negative information will not stay on a person’s record forever, but it can be listed for a substantial amount of time. For example, ChexSystems says that information can stay on one of its reports for five years.
“It’s not a life sentence. You’re not going to be what’s referred to as ‘unbanked’ forever, but there is going to be a time when your ability to have a relationship with a mainstream banker is limited,” Ulzheimer says.
To avoid banking problems in the future, always pay attention to checking account balances, Allen says. “Customers need to monitor their banking accounts and be sure to track the transactions to avoid overdraft charges and merchant fees,” she says.