Blacklisted by ChexSystems? Here’s what it is and what to do

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If you apply for a new checking account and your application is denied, chances are there’s a negative report of your banking history on your consumer disclosure report by ChexSystems.

ChexSystems is a specialty consumer reporting agency, or CRA, operating under the Fair Credit Reporting Act. It is similar to a credit bureau, but instead of tracking your ability to pay bills on time, it compiles information provided by banks and credit unions about your deposit and debit history — generally only if it’s blemished.

“A history of overdrawn accounts will be reflected on your ChexSystems report and could stand in the way of getting a new checking account much the way a history of loan defaults would make prospective lenders unwilling to extend credit,” says Greg McBride, CFA, Bankrate chief financial analyst.

How does ChexSystems work?

ChexSystems helps financial institutions assess the risk of accepting you as a customer. The credit reporting agency collects information on the way you have used bank accounts in the past to create a report and issues a risk score based on that information.

Banks rely on these consumer disclosure reports to determine whether to grant a customer access to a bank account. These reports were designed to warn banks about potential thieves who purposely commit fraud, but over time have increasingly included consumers who have made honest mistakes, such as inadvertently overdrawing funds.

Consumer reporting agencies, like ChexSystems, must follow certain regulations, such as reporting information accurately and investigating disputes of these reports by consumers in a timely manner. ChexSystems is overseen by the Consumer Financial Protection Bureau and the Federal Trade Commission.

What information banks report to ChexSystems

ChexSystems’ website lists common mistakes that consumers make that may result in a negative consumer disclosure report. They include:

  • Unpaid negative balances (as a result of overdraft fees, for example).
  • Bouncing checks.
  • Suspected fraudulent activity.

Chi Chi Wu, a staff attorney at the National Consumer Law Center, says banks’ overdraft policies are largely to blame for many of the negative reports compiled by credit reporting agencies.

“Banks have these terrible overdraft practices where they allow people to overdraw their account, including by using their debit card when they could decline the transaction without charging a fee,” Wu says. “Then they charge this enormous fee of $35, which sometimes exceeds the amount overdrawn, and they charge that fee for every overdraft.

“It’s one of the top reasons people don’t have a bank account. In some cases, the account is closed because the overdraft fees aren’t paid. That results in a negative report on ChexSystems or Early Warning services, and that prevents the consumer from opening another bank account.”

This can result in serious consequences, as the consumer is often forced to use expensive financial alternatives to handle routine transactions.

A recent Federal Reserve report on the economic well-being of U.S. households reveals that six percent of adults had no bank account in 2019, but the problem was more widespread among racial and ethnic minorities, with 14 percent of Blacks and 10 percent of Hispanic adults unbanked. Another 16 percent of U.S. adults were considered underbanked because while they may have a bank account, they still used expensive alternative financial services to manage their money.

How to get a copy of your ChexSystems report

You can get a copy of your consumer disclosure report either online or by mail by filling out a form available on ChexSystems’ website.

“You are entitled to a free annual report,” Wu says. “When banks use the consumer reporting agency to deny you a bank account, the bank is required to send you an adverse action notice.”

If you get such a notice, you also have the right to a free report, which will give you the opportunity to see if it contains errors.

“If you do find issues on your report, make sure everything is accurate, just as you would with a credit report, and dispute anything that is inaccurate,” McBride says.

Errors can be disputed on ChexSystems’ website, by mail or by fax.

Other legitimate requests for your report, according to ChexSystems, may include:

  • A business transaction that you initiated.
  • An application for a license or government benefit where proof of financial responsibility is required.

To access your report, you will be required to divulge your Social Security and driver’s license numbers, as well as other personal identifying information. ChexSystems claims that all personal information sent from a consumer’s computer is encrypted while in transit and once it arrives at its servers, it is decrypted to protect privacy.

I’ve been denied. Can I get a bank account?

If you’ve been blacklisted by ChexSystems, you still have options.

“Some banks and credit unions offer second-chance checking accounts, designed to help someone that has had previous missteps get back on the right track in managing their account,” McBride says.

Second-chance checking accounts may involve a monthly fee, a minimum balance requirement or both, but it gives the consumer the opportunity to show that the account can be managed responsibly.

There are also safe bank accounts — checking accounts that don’t offer checks, but provide a debit card— that might work for you, too.

“Safe bank accounts could be another option,” Wu says. “The main feature of safe bank accounts is that they are low cost, avoid overdrafts and do not charge overdraft fees.”