ChexSystems: The Banks’ Secret WatchDog is Watching You

Have you ever been turned down for a checking account? While denials are more common when applying for credit, you can also be declined when applying for a bank account. If you have been declined, it’s likely due to a reporting agency that many have never heard of, but who has a lot of information about and influence over banking customers. It’s called ChexSystems.

Most have heard of the three major credit reporting agencies–Experian, Trans Union, and Equifax. But there is a lesser-known but equally important reporting agency for checking accounts called ChexSystems. Run by Chex Systems, Inc., ChexSystems provides account verification services to its financial institution members to aid them in identifying account applicants who may have a history of account mishandling (for example, people whose accounts were overdrawn and then closed by them or their bank).

We’ll take a look at ChexSystems and how it works. Then we’ll look at how you can get your ChexSystems report.

What is ChexSystems

Like the major credit reporting agencies, Chex Systems, Inc. is a consumer-reporting agency governed by the federal Fair Credit Reporting Act (FCRA). Much like a creditor can report late payments or charge-offs to a credit reporting agency, a financial institution may report NSF (non-sufficient funds) or overdrafts to ChexSystems.

Information reported by banks to ChexSystems typically stays in the system for five years. Items are only removed before the expiration of the five-year period if the reporting financial institution requests the item to be removed or applicable law requires ChexSystems to remove the derogatory item.

Items also remain in the system for five years even if the banking consumer has paid for the item. For example, a bank may report an overdraft to ChexSystems before the bank customer has paid the item. If the customer thereafter pays the item, the overdraft remains in the ChexSystems’ database. The reporting institution, however, should notify ChexSystems that the item has been paid.

What information is reported to ChexSystems

As noted above, one of the most common items reported by banks to ChexSystems is a customer’s overdraft or NSF transaction. In addition, the ChexSystems contains identifying information about banking consumers, including social security numbers and driver’s license numbers. If identity theft has been reported or a security freeze has been placed on the account, the ChexSystems database also will note this information.

The ChexSystems also notes inquiries initiated by consumer action (e.g., applying for a bank account) and those not initiated by a consumer action (e.g., current creditors, potential employers). Finally, ChexSystems can include information reported by retailers through Shared Check Authorization Network (SCAN). SCAN is a comprehensive database of bad check writers in the United States. Participating retailers can obtain a customer’s history of bad checks, if any, and then make a decision on whether to accept their check. This information is also reported to ChexSystems.

How to Avoid the ChexSystems

Because ChexSystems can prevent a consumer from qualifying for a checking account, it’s important to avoid the common mistakes that can trigger a ChexSystems report. Of course, intentional overdrafts or bad check writing will certainly result in a ChexSystems report from a financial institution. But there are also some common mistakes that people make that can risk a negative report.

Here are some of the common mistakes to avoid according to ChexSystems, along with their recommended solutions:

• Forgetting to stop automatic payments from being taken out before closing an account: Make certain to identify all automatic payments and discontinue them before closing your account. If you do not, you could face steep fees, even after the account is closed. When you request payments to stop, be sure to ask the company how long it will take to process your request. Often companies can take up to two weeks to make your requested payment change. In the meantime, additional payments could be deducted from your account.
• Closing your checking account by letting it go to a zero balance: Always contact your financial institution if you wish to close your account. If you do not formally close your account, fees may be charged even after the funds in the account are depleted. Then you will have a negative balance in your account and possibly overdraft fees, which you will be responsible for paying to the financial institution.
• A check you deposit in your account does not clear or bounces, causing the account to go into overdraft: Just because you have deposited the check does not guarantee the check has the funds to support it. When depositing checks, allow enough time to make certain the check clears (usually 3-5 days, depending on the institution) before writing checks against the balance.
• You wrote a check for more than you have in your account: It is very important that you balance your checkbook regularly so that you always know your account balance. If you discover that you have written a check for more than you have in your account, immediately deposit funds to cover the amount of the check and any associated overdraft fees.
• You co-signed on an account that was abused by the other party: Be very cautious when agreeing to have a joint account or becoming a co-signer on someone else’s account. Regardless of which signer mishandles the account, both signers may be held responsible.
• You gave your PIN (Personal Identification Number) to someone else and they took funds from your account without your authorization: Never give your PIN to someone else. It is like opening the door to your finances. Inform your financial institution of the situation. They may suggest that you change your PIN or they may suggest that you close the compromised account and open a new one.
• You post-dated a check and it was cashed too early: Post-dating checks is dangerous because there is no legal obligation for the other party to hold the check. You are simply relying on the other party to wait to cash the check on the post date. If the check is accidentally cashed early, you are responsible. It is best to wait to write the check when you have the money available in your account.
• You’re not receiving statements or correspondence from your financial institution: If you have moved or changed names, it can sometimes take time for your mailed account statement to catch up with you. Always notify your financial institution when there are changes to your personal information. Not knowing the status of your account does not excuse you from being responsible for it.
• You discover an account or handling error by the financial institution: Financial institutions make mistakes too. Errors, such as posting to the wrong account number or unauthorized withdrawals, have been known to happen. It is important to review your financial institution statements and receipts closely for inaccuracies. Bring any questions or errors to your financial institution’s attention immediately. The sooner you do, the easier it is for the financial institution to correct them.
• Your checks are lost or stolen: If your checks are lost or stolen, report it immediately to your financial institution. Stopping payment on checks BEFORE they fall into the wrong hands is much easier than after someone has falsely written checks against your account. See check fraud for additional information.

For those that can’t get a checking account, a low-cost prepaid card that offers direct deposit is a great alternative. One of the top prepaid cards is the Vision Premier Prepaid Vision Card, which comes with no activation charge or weekly fee if the direct deposit feature is used.

How to Request your ChexSystems Report

Finally, if you think you may be in the ChexSystems, you can request your report. Just as you are entitled to your credit report every 12 months, you are also entitled to your ChexSystems report.

Related:

• What is a Second Chance Checking Account and Where Can You Get One?
• Best No ChexSystems Banks