Unless you stuff all your cash under your mattress or convert it into precious metals, it’s likely that you’ll need access to banking at some point. Luckily, in many cases, it’s easier than you’d imagine to open a bank account even if you have bad credit.
We’ll explain how banks evaluate you when you apply to open an account. We’ll also provide you with four options to try if your initial application gets denied before you settle on a second-chance checking account or an even more expensive alternative.
Opening a Bank Account With Bad Credit? Your Credit Score Probably Doesn’t Matter
In most cases, your credit score does not directly impact your bank account application. You can have bad credit and still open a normal bank account.
Try opening a regular checking account first. You may not need a second-chance checking account or another alternative.
If you apply for a regular bank account and get denied, try a few more banks before doing anything else.
Depending on the reason the original bank denied your application, another institution may feel more comfortable giving you an account based on the same information.
If you’ve been accused of committing identity theft or bank fraud, it’s going to be hard to open a bank account anywhere. But if you’ve overdrawn your account a few times, one bank may decide that’s too much, and another may see that you paid back that debt and view you as an acceptable risk.
There’s no harm in applying for an account at more than one bank, as it doesn’t “ding” your credit report or banking history.
Don’t give up and jump into a more expensive option for your banking if you can’t open a regular bank account immediately. There are other things you can do.
How Do Banks Evaluate My Application To Open An Account?
Bank accounts rely on a handful of companies that are similar to credit bureaus. But instead of Experian, Equifax and TransUnion, they’re called credit reporting agencies (CRAs), and the big three are ChexSystems, TeleCheck, EWS and Certegy.
If you’re trying to get a loan, the financial institution will check your credit score. If you’re trying to get a new bank account and you’ve written a bunch of bounced checks, it will probably show up on a CRA. That’s one reason a bank may decide you exceed its risk tolerance.
ChexSystems is the most popular CRA that reports your banking history. If banks are denying you, it could be because of something in your ChexSystems report.
Banks may also look at your credit report to help verify your identity when you open an account. But, as a general rule, your credit score does not influence the bank’s evaluation of your application for an account.
4 Steps to Try if Your Application Gets Denied
Many financial institutions offer second-chance checking accounts to people who have too many negative items in their banking histories. We’ll talk more about second-chance checking accounts and other alternatives later in this article.
If you have bad credit and you’re trying to open a bank account, you should follow these four steps first.
1. Apply for a regular checking account at more than one bank. Different banks may interpret your banking history report in different ways. So one bank’s evaluation may let you open an account even after another bank has rejected you.
2. Identify negative items on your ChexSystems report and try to fix them. You can access your ChexSystems report for free. If it includes negative information, there’s a chance you can resolve those issues and have them removed from your report. I’ll walk you through this step later in this article.
3. Find a bank that doesn’t use ChexSystems. If Steps 1 and 2 don’t work, you should apply at a bank that doesn’t rely on ChexSystems. Some of the regional and national options that don’t use ChexSystems include:
4. Open an investment account. Some investment firms, including Fidelity and TD Ameritrade, will let you open investment accounts without checking your banking history. And some of those investment accounts, also known as brokerage accounts or cash management accounts, offer check-writing privileges.
What Is ChexSystems and How Does It Impact Me?
Banks use ChexSystems and other agencies to investigate your banking behavior in order to help them assess how much of a risk you would as an account holder.
ChexSystems accesses your banking history through your social security number.
How to Access Your ChexSystems Report
If you apply for a regular bank account and get denied, there’s a good chance it’s because of something on your ChexSystems report.
Fortunately, you can access your report for free and find out why banks may be denying your application. There are several ways to access your report:
- Submit a request on the ChexSystems website. If a bank denies your application due to information on your ChexSystems report (or any CRA report), the bank must tell you why, according to the Fair Credit Reporting Act. You can get a free report once a year even if you haven’t been denied.
- Request your report via an automated phone system. Call (800) 428-9623 and follow the prompts.
- Print, complete and mail the Consumer Request for Disclosure Form. Send it to ChexSystems, Inc., Attn.: Consumer Relations, 7805 Hudson Road, Suite 100, Woodbury, MN 55125.
- Print, complete and fax the Consumer Request for Disclosure Form. Fax it to (602) 659-2197.
Here’s what your ChexSystems report may look like:
Potential ChexSystems Issues
- Unpaid overdraft fees
- Overdrawn accounts
- A volume of bounced checks
- Excessive withdrawals
- Security alerts
- Bank fraud
- Identity theft
Ways to Resolve ChexSystems Issues
Even if your bank doesn’t use ChexSystems, your free report can alert you to the types of information that may be hindering your application.
Fortunately, because ChexSystems and other CRAs track only your banking history, that does not impact your credit score. You can have a great ChexSystems score and a bad credit score. The reverse is true as well.
Depending on which of the issues your CRA report lists, you may be able to resolve them in one of these ways:
- Submit a dispute. If you believe any information on your ChexSystems report is wrong, you can file a dispute directly on the ChexSystems website. ChexSystems states on that website that it usually completes investigations within 30 days.
- Pay the bank. If you owe money because of overdraft fees, overdrawn accounts or anything else, you can contact that bank, ask to pay your debt and then ask the bank to remove the item from your ChexSystems report.
- Wait. Most ChexSystems records fall off your report after five years. If you’re already close to the five-year mark, you could have a clean report soon.
What Are Second-Chance Checking Accounts?
Some banks and credit unions offer you the opportunity to open a second-chance checking account even if you have a lousy banking history.
Second-chance checking accounts work like regular bank accounts — but with certain limitations.
They can charge high monthly fees, probably won’t allow you to write checks and may require higher minimum balances or regular direct deposits. Some allow you to have a debit card and make free ATM withdrawals.
The best reason to use a second-chance checking account is that they come with a “graduation” plan. If you use the account responsibly for a period of months, or depending on the bank, even a few years, the institution will upgrade you to one of its regular checking accounts.
Before you open a second-chance checking account, be sure you understand the fees and requirements.
Listed below are some second-chance checking account options. Money expert Clark Howard says some local credit unions offer these accounts, and you can check online-only banks as well.
Consider These Banking Alternatives As Last Resorts
Living an all-cash life can be challenging and costly.
About 25 percent of Americans are unbanked or underbanked, according to a 2017 study by the FDIC. Some of these individuals turn to predatory business models like payday loan and check-cashing businesses that charge significant fees.
It’s important to try opening a regular bank account first. If for some reason you can’t secure a regular account or a second-chance checking account, there are still a few options you can explore as banking last resorts. They are not as good as regular bank accounts, but in most cases, they’re better than handing over a large portion of your paycheck in the form of a fee just to be able to cash it.
You can apply for these options online or purchase them at retail locations in the case of pre-paid debit cards.
Pre-paid debit cards. You can deposit, make and receive online payments and make in-person purchases with these cards. They typically charge per-transaction fees. You can use only money that you’ve stored on the card. This is not a credit card.
Secured credit cards. These function like pre-paid debit cards, but instead of charging transaction fees, you pay sharp interest rates. You can add money, transfer funds and make payments. Your deposit amount becomes your credit limit. A major benefit of secured credit cards is that they can help you build your credit score.
If your bank account application gets denied, do not give up your search and immediately accept a more expensive option. There are many ways to get access to banking that don’t require you to overpay.
If you know you have bad credit and you’re trying to open a bank account, in some ways, you’re already limiting yourself as a customer. Some institutions love to spend marketing dollars acquiring customers who are ready to accept fees and restrictions because of their financial histories.
Every situation is different. But in many cases, with perseverance and research, you can find a way to open a standard bank account.