People know that bad credit can impact things like loans, auto and apartment leases, or even obtaining a credit card. But can bad credit also affect opening a checking account? That depends. When you’re going through financial hardship, it’s easy to make decisions that could negatively affect your credit. One loan default or missed payment could stay on your credit report for up to seven years. If you have too many outstanding debts in your credit history, it may be hard to find a checking account for bad credit at most banks or other financial institutions.
While your credit history, which is tracked by the 3 major credit bureaus (Equifax, Experian and TransUnion) affects your ability to get credit cards, loans, and mortgages, it usually doesn’t directly affect obtaining a bank or checking account. However, financial institutions have their own version of a credit check that tracks your banking behavior. There are a few tracking agencies but ChexSystems is the most ubiquitous one, with roughly 80 percent of the banking institutions using it to vet potential clients who may want to open a checking account with bad credit history. Some negative things that could potentially be on a ChexSystems record:
- Numerous, unpaid overdraft fees
- Suspected or actual bank fraud or identity theft
- Owing a bank money
- Overdrawn accounts
- Numerous bounced checks
- Account freezes
- Excessive withdrawals
- Security alerts
How is Bad Credit Determined?
Usually, banks only want to give accounts to creditworthy customers to avoid losing money on overdraft fees. The most common way for them to check your banking history is by using ChexSystems. This is a consumer reporting agency that looks up the credit history associated with your social security number. This data will include your complete checking and savings account history, as well as any bounced checks, fraud, or other factors that make you a risky applicant. Financial institutions may also evaluate your credit history by taking a look at your credit score. This is a number assigned to you based on your credit card and loan payment history. A credit score of 579 or lower is considered poor by most financial institutions.
Options If You Have Bad Banking History
While it can be difficult to find a bad credit checking account, some banks may disregard your past mistakes and give you another opportunity to open a checking account and rebuild your credit. If you have a history of bad credit and need a checking account, you still have options. If you’ve tried to open your own checking account in the past and your application was denied, it’s probably because the bank used a service like ChexSystems and determined that you have a poor financial or banking history by looking for red flags such as overdrafts and unpaid banking fees. While banks for bad credit are not common, you may be able to find a bank that won’t check your financial history, but these usually come with some strings attached. You may be required to make regular direct deposits or have a certain amount of money in your balance at all times to fix the effect of bad credit on your savings account.
Options If Bad Credit Gets in the Way
If a bank doesn’t use ChexSystems, then it will most likely run a credit check before approving your account because they want customers who make good financial decisions. During a credit check, a bank associate will contact a credit bureau and obtain your full credit report that includes a history of transactions on all of your past and current bank and credit card accounts. If you have had repeated problems in the past repaying a credit card bill or a loan, banks will typically deny your checking account application.
There are certain banks that won’t check your credit, but you may be subject to additional fees on your account. Although it may be difficult you can still apply to open a checking account for bad credit. Another option may be to try opening an account at a credit union (provided you are a member) or an online bank as they tend to be more flexible on credit history.
A Second Chance To Open a Checking Account for Bad Credit
Some banks will allow you to open a checking account even after seeing poor results in your credit check. They understand that customers looking to improve their banking history, need to open what they call a “second chance” account. Second chance bank accounts work just like regular checking accounts but have certain limitations.
While some bad credit checking accounts may offer direct deposit or debit cards, they often have restrictions on writing checks or online banking. You also may be subject to multiple monthly fees. While these can be annoying, a second chance bank account will help show financial institutions that you’re a reliable customer. If you can maintain a positive balance over a period of a few months to a year, most banks will give you the option to upgrade your second chance account to a standard checking account.
Request a Review of Your Application for Checking Account with Bad Credit
Even if your application was denied, you can still try asking the bank to reconsider their decision. Some circumstances that caused your credit score to decline may have been out of your control, such as losing a job. If possible, speak with a bank associate in person and explain your situation. You should also make it clear that you have learned from your mistakes and are dedicated to improving your financial history.
Take Charge of Your Financial Profile
If you’re feeling discouraged by a less than stellar credit or financial history, don’t despair. First, you’re not alone; many people have had setbacks in this area and with a little hard work, you can find banks for bad credit. Second, most people don’t know that they can order their own ChexSystems report and that you’re allowed one free report each year. By doing this, you can see firsthand what needs to be fixed in your credit history. In some cases, these reports may contain errors that could keep you from opening a checking account. If this happens, you can file a dispute and have them removed.
If everything is correct, see if you are able to pay back any loans or debts that you neglected in the past. If you can work out an agreement with your lenders, they will be able to take your mistake off of your ChexSystems report. If you have a ChexSystems record that you can’t dispute, you must wait 5 years from the date the record is added for it to be dropped.
Other Options When All Else Fails
If you’ve tried everything and still hit a dead end when trying to open a checking account for bad credit, consider these options:
- Open An Investment Bank Account. Investment accounts through firms such as Merrill Lynch or Fidelity, often need large opening deposits, but usually offer an additional checking account and do not rely on credit scores.
- Get a Prepaid Debit Card. If you need access to banking and ATM services, consider getting a prepaid debit card. While may pay more in transactional fees, a prepaid debit card allows you to send and receive money between accounts, make purchases and withdraw cash at ATMs. While they are not as good as a bank account, prepaid debit cards are a good substitute.
- Get a Secured Credit Card. A secured credit card is a credit card with a deposit you put down on it. That deposit is held and becomes your credit limit so you can use it like a regular credit card. Secured credit cards don’t usually have transactional fees and you get the side benefits offered by credit card (travel insurance, extended warranties, fraud protection) depending on the type of card and the bank offering the card.
The Bottom Line
Being denied because of poor credit can be frustrating and embarrassing, but you can find a bank that will be able to work with you to help improve your future credit rating. And once you do manage to open a bank account, make sure to pay all the associated fees, avoid overdrafts and other negligent activity, and keep the account in good standing while you work to repair your credit and you’ll be on the upswing in no time.