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. They do this by running a bank history report on you, which is different from a credit check.
Financial institutions check to see if a past account was “closed for cause,” meaning the bank or credit union shut down the checking account because of something you did. If the report shows you have a record of mismanaging other bank accounts, the institution could refuse to open a new account.
Here’s how bank history reports work and what you should do if you’ve been denied a checking account.
Looking for patterns in your banking history
There are a few reasons your bank account may be closed for cause:
- You failed to pay insufficient funds fees after overdrafting your account.
- You have a history of writing bad checks to merchants.
- You’ve committed fraud.
Financial companies access your bank history data through an account verification service.
“Bank history information is voluntarily reported to database clearinghouses that serve member banks,” says John Ulzheimer, president of the Ulzheimer Group.
The most well-known verification service is ChexSystems in Woodbury, Minnesota. When a potential customer applies to open a new checking account, the bank or credit union asks ChexSystems to run a search against the service’s database to see if any problems have been reported.
That bank history report might return nothing, which is what you’re hoping for. But if there is a record, it will show the name of the institution, the date the account was closed and whether any money was owed (but not how much) to the institution.
You have access to this data, too.
It’s collected under the requirements of the federal Fair Credit Reporting Act. That act allows you to request a free report once every 12 months from ChexSystems or other verification services. Ask your bank or credit union for the name of the verification service used when you apply for a checking account, Ulzheimer says.
Watch out for credit checks
Past banking records aren’t the only information a bank or credit union will research before deciding whether to open a checking account. 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.
You should know whether these black marks are on your credit report. If you’re unsure, check your report before applying for a new account.
What you can do
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. 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. 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,” says Kimberly Allen, a certified counselor in Williamsburg, Virginia.
Some banks also may require customers to participate in a financial management workshop before they can open a second chance account, she says.
The good news is, negative information will not stay on a person’s record forever. ChexSystems says information can stay on one of its reports for five years.
To avoid banking problems in the future, always pay attention to checking account balances.
“Customers need to monitor their banking accounts and be sure to track the transactions to avoid overdraft charges and merchant fees,” Allen says.