If you have found yourself in a situation where your check has been denied or your checking account has been terminated, you may have heard about ChexSystems. If this hasn’t happened to you, then the chances are that you’re probably not aware of ChexSystems’ existence.
ChexSystems is a bank activity reporting agency that works with all the major financial institutions to collect data and report any irregular banking activity. This can include bounced checks, recurring overdrafts, fraud, and forgery.
Getting flagged by ChexSystems rarely results in many positive developments. If negative events are recorded to your banking history report, this can result in your checking account getting terminated. To make matters worse, these negative events on reports last for up to five years, making it very challenging to be approved by another institution for basic banking services.
This article takes a look at how ChexSystems works and can provide you with the answers as to why you may have been reported by their system.
What is ChexSystems?
ChexSystems is a specialty Consumer Reporting Agency (CRA) in the United States that was created under the federal Fair Credit Reporting Act (FCRA). It tracks the checking and savings account activity of consumers, similar to how credit reporting agencies like Experian, TransUnion, and Equifax collect information on credit card and loan history.
Unlike the credit reporting agencies, ChexSystems does not have anything to do with credit scores. Customers looking to obtain a loan from a bank won’t consider their ChexSystems report but instead focus on their credit score.
ChexSystems is utilized to determine whether or not a particular banking institution will approve you for a checking account.
If ChexSystems considers you to be high risk due to past banking mistakes, there is a chance you will not be approved to open a checking account.
It has been shown that about 85 percent of banks in the U.S. use ChexSystems when screening applicants for new checking accounts.
With that in mind, it is important to understand there are 330 million consumers in the country, and ChexSystems has data on 300 million consumers. This is a large number of records readily available for banks to make their decision on whether or not they will allow you to bank with them. The information is provided by your financial institution and is then made available to every other bank.
If you find yourself in a situation where you’re unable to open up a new bank account, it could be because of negative information that was reported by ChexSystems. However, many people often find themselves unaware of what they did to get reported.
7 Reasons Why Consumers Are Reported to ChexSystems
If you’re suspecting or are already aware that you’ve been reported to ChexSystems, it’s important to understand why. Here are some of the most common occurrences that land people in their database.
1. Check Kiting
Check kiting is a type of check fraud that will not only raise red flags with ChexSystems but will also likely land you in jail.
People who kite checks essentially write a check from an account at one bank and proceed to write another check from another bank account to cover the funds being taken out from the first bank account, even if there aren’t enough funds to cover the expense.
This form of check fraud is often performed across many different banks, usually more than three. Those engaging in this kind of illegal activity will most likely be caught and could face much more than just getting their bank account terminated. Check kiting often results in serving jail time.
2. Check Floating
Check floating is another form of check fraud that has unfortunately become a common practice. It originated during the times when it would take several days or even a week for a check to clear.
People who floated checks would write a check knowing that they didn’t have sufficient funds to cover the check but also knew that they would be getting paid within the next couple of days.
Back when it took a long time for checks to clear, this didn’t pose much of a problem. But with the rise of faster technology checks can be cleared the same day, sometimes within minutes.
With that in mind, those who don’t have sufficient funds in their account when the check clears, are more likely to have their check bounce now that check clearance times are so fast.
3. Too Many Overdrafts
Overdrafts occur when you withdraw more than your available account balance. This can happen when making a purchase that costs more money than you have available in your account.
When this takes place, one of two things can happen. The best-case scenario is that the transaction is denied. The worse outcome would be the transaction going through and will result in an overdraft to your account, which usually carries a fee.
Avoiding overdrafts is critical if you’re trying to maintain good financial standing with your bank. Not only are they expensive, but they will most likely be reported to ChexSystems.
4. Unpaid Balance
All negative balances on your account will have to be paid. Unpaid balances can accumulate through overdrafts and insufficient funds charges. They can also occur from cashing a check that bounces.
If unpaid balances aren’t paid on time and the account isn’t brought back to positive, you will likely be reported to ChexSystems.
5. Leaving Old Accounts Open
When switching banks, you should consider closing your account before opening a new one. This is because old bank accounts that remain active can collect fees that you aren’t even aware of while you’re banking with another bank.
Not paying those fees can result in unpaid balances, which could once again result in being reported to ChexSystems.
6. Bouncing Checks
Writing a check that you don’t have enough money in your account to cover will result in a bounced check.
Consumers with overdraft protection might think that they don’t need to worry, but banks will see this as a negative activity and will report you to ChexSystems. Bouncing a check automatically puts you in the high-risk category making it unlikely for other banks to approve you for a checking account.
7. Incorrect Account Information
Opening an account in someone else’s name is clear-cut fraud. Committing fraud can land you in some serious legal trouble, making ChexSystems the least of your worries at that point.
Never provide information you know is inaccurate when applying for a bank account. Signing an application confirms that all the information you provided is true.
If upon further review, the information is proved to be false, you will be reported to ChexSystems and could face potential legal trouble.
How Long Do Negative Events Appear in ChexSystems?
This is a very common question. If you’ve been flagged by ChexSystems, you might be wondering how long the negative information will stay on your report. Typically, all activity flagged by ChexSystems remains on a banking activity report for five years. But there are exceptions.
Those who successfully file a dispute can have negative remarks deleted from their ChexSystems report. Negative items can also be removed if you prove that an unpaid balance was paid. However, in most cases, negative listings will usually appear for five years.
Banks and credit unions tend to have their policies and procedures that they follow regarding what they report to ChexSystems. This makes it difficult to know exactly what activities will result in a negative event. Some banks will take three months to report a negative balance, whereas others will do it within one month.
What is a ChexSystems Score?
Much like a credit score, you also have a ChexSystems score. Your ChexSystems score provides an overview of your banking history. This score is also commonly referred to as a QualiFile Score.
Most banks and credit unions will look at this score when they are determining your level of risk as a potential customer. The score ranges from 100 to 899, like credit scores. The higher the number, the better the score.
Those with high scores are considered to be safe customers that pose little to no risk to the bank. These scores are not to be confused with credit scores which are not taken into consideration when opening a checking account.
What Happens to Other Accounts After You’ve Been Reported to ChexSystems?
If you already have a bank account with bad banking history and negative listings reported to ChexSystems, you might think you’re in the clear since you already have an open account. However, this isn’t always the case.
Your Bank Accounts at Other Institutions May Be Closed
If you have more than one account across different banks and you’ve only had trouble with one of them, don’t be surprised if you find all of your accounts closed or frozen in the near future.
In addition, it is important to understand the process of account sweeping. This is when a bank decides they’re going to review your account information to see if anything has been reported to ChexSystems.
If the bank discovers that a consumer has been reported, they could end up freezing or terminating the account. Unfortunately, in many cases, your previous history will not be taken into consideration prior to the negative event, making this a frustrating situation.
Some Checks Companies May Report Your Information to ChexSystems
If you have accounts that are open and in good standing, you should still be careful where you order checks. Some companies making checks will share your information with ChexSystems. If you’re in the system and they notice that you’re ordering checks, they will then proceed to report you to your new bank.
This could leave you with closed or frozen bank accounts. With this in mind, we recommend staying away from companies like Designer Checks, Checks Unlimited, and Current Checks to name a few.
What to Do if Your Account is Flagged by ChexSystems
If you’re notified of a negative listing on your ChexSystems report, the first thing you’re going to want to do is to decide whether or not you wish to dispute the negative entries. When making this decision, here are some things to consider to ensure you don’t receive any additional negative marks.
1. Know How Much You Can Spend
If your account has been flagged, you’re going to want to keep a close eye on the account. Use the online banking features provided by your institution as well as a check register.
This will allow you to know the amount of money you have in your account, as well as give you an accurate timeline of when checks will be cashed by the party you sent them to. Make sure to consider the actual balance after a check has been cashed and not the current balance listed in your account.
For example, say your account has $150, and you decide to buy some groceries. After you buy the groceries for $75, you realize that you recently wrote a $100 check to the cable company that hasn’t been cashed yet.
In this situation, you will end up bouncing your check because you failed to account for the cable bill you paid earlier that week. It is extremely important to keep track of your current balance at all times, especially after your account has already been flagged by ChexSystems.
2. Make Sure Your Contact Information Is Updated
Sometimes consumers will have problems with their bank because their contact information is out of date and they don’t check their account regularly. Those who don’t regularly check their accounts could find themselves with an unpaid balance or overdraft fee that they were unaware of.
If the bank can’t reach you by phone, email, or postal mail due to out-of-date contact information, you will still be at fault and will be reported to ChexSystems.
With that said, take a moment to go over your account information and make sure everything is up to date.
3. Enroll in an Affordable Overdraft Protection Service
Banks that charge exorbitant fees for overdraft protection should be avoided. It is strongly recommended to go with a bank that either has no fees for overdraft protection or doesn’t offer overdraft protection.
With consumers writing fewer checks these days, bounced checks are no longer the concern that they used to be. For the most part, consumers use their checking account debit card, which will usually be declined if you don’t have enough funds to cover the transaction. This overdraft protection will save you from having to pay a $35 overdraft fee.
Banks with overdraft protection will usually require their client to have a good credit rating to be approved for this feature. If your credit isn’t so great, we recommend you opt out of overdraft protection.
Depending on this feature should not be something to be taken advantage of. It is there for emergencies and should be treated as such.
How to Get a Copy of Your ChexSystems Report
Every year, consumers are entitled to a free copy of their ChexSystems report. Copies are also provided to those who have been rejected by a bank in the last 60 days. These reports will not include your score in most cases, but a copy can be purchased directly from ChexSystems upon request.
It is recommended to order your free report through the mail or by fax. This is because if you obtain your free annual report online, ChexSystems will be at an advantage if you decide to dispute entries on your ChexSystems report in the future.
With this in mind, we recommend filling out the PDF form provided on the ChexSystems website and mailing it in. Do not request your report through their online request system!
The Best Second Chance Banks by State
If your bank account has been terminated due to negative listings in your ChexSystems report, not all hope is lost. A lot of community banks and credit unions offer second chance accounts to those that have been reported to ChexSystems. Getting a second chance account will allow you to access most of the same privileges as a traditional checking account.
Our sister website, CheckingExpert.com, regularly updates a list of banks offering second chance checking accounts in every state. Here’s an overview of these accounts and where you can find them in your area.
If you find yourself in a situation where you’ve been blacklisted by ChexSystems, you might be worried that you will no longer be able to open a bank account. This can be very challenging for anyone who is trying to pay their bills or make everyday purchases.
Because ChexSystems listings can last for up to five years, it can make opening a new bank account very challenging. With 85 percent of banks in the U.S. using ChexSystems, going to the branch across the street will most likely not result in approval.
Just remember that you always have options. Sometimes they require a little more work, but with a little time and patience, you can move forward and better your financial wellbeing.