Most people are aware of the banking crises that occurred in the mid-2000s. Banks and mortgage lenders were allowing consumers with poor credit ratings to qualify for homes that were far above their ability to pay. This led to loans that were lower tiered and often resulted in a payment change within two years of the mortgage being obtained.
Because of this gross negligence in the banking and mortgage industry, the financial fallout hit in a variety of locations. Homes across the nation began foreclosing, while businesses and banks felt the pinch of consumers who could not pay their debt. As the United States economy wobbled, creditors of all types began tightening their requirements for what was considered a “qualified buyer.”
Thus, the banking system over-haul began. While most people don’t think about their banks, the banking industry realized that they needed to lower the amount of debt laden customers they had as members. The ChexSystems is not a new system. However, it became more relied upon by banks to assist them in pre-screening customers prior to allowing them to open an account with their company.
ChexSystems is an agency that closely monitors checking and savings accounts to protect banks. They gather detailed information regarding individuals who have had trouble with their checking or savings account being closed due to cause. The following are a sample of some of the ‘causes’ that can be reported:
- Multiple overdrafts on an account(s)
- Checking, Savings, or ATM abuse
- Providing false information when opening an account
- Inability of the financial institution to collect NSF fees and charges once a bank has already paid the amount
When an individual finds themselves on the ChexSystems list, it frequently becomes the equivalent of a financial death wish. Once the name of the individual is added into the system, it stays with that individual’s social security number and driver’s license number for 5 full years. In fact, the resemblance between ChexSystems and a Bankruptcy on a credit report are startlingly similar.
Is ChexSystems a Credit Bureau?
Often, when a person finds their name in the ChexSystems database, they think it has to do with their credit score. This is false. Credit scores are tied to consumer credit accounts. Anything that has an installment payment, whether with or without collateral, is reported to a credit bureau like TransUnion or Equifax.
However, ChexSystems does not refer to credit history at all. They look at the financial risk to a financial institution for allowing a person to deposit their money appropriately.
How Does ChexSystems Determine Risk?
Risk for a financial institution is calculated slightly differently than credit risk. When a customer walks into a bank and wants to open a basic checking account, there are standard requirements. The customer must have an official form of identification, social security number, address, etc.
A bank needs to be able to determine if the potential customer is a good risk. Some questions that a bank must consider are the following:
- Does the customer have money to deposit?
- Is the customer employed?
- Has the customer ever bounced or kited a check? If so, how frequently?
- Does the customer have a history of a negative bank balance?
- Has the customer abused overdraft protection?
If the answer to any of those questions is yes, then ChexSystems will have a record of it. If a customer appears in the database, then they are deemed a risk for the bank.
Will a Bank tell me that I am in the Database?
In short, no. While over 99% of United States banks use ChexSystems, they frequently decline to tell customers why they are being turned down for opening an account. Banks use fairly generic phrases to tell a customer that they do not meet that bank’s particular guidelines.
However, it is certainly within a customer’s right to ask for a more detailed explanation. Although if a customer knows that he or she has been bouncing checks, there is no reason to pursue the matter. But, if an individual is declined and they are truly unsure as to why, it is worth pursuing.
Do all Banks Use ChexSystems?
There are banks within the United States that do not use ChexSystems. However, the numbers of these banks are getting smaller every year. It is also difficult to find non-ChexSystems banks publicly listed.
Will ChexSystems Banks Always Decline my Service if I am in the Database?
Although banks are very concerned about financial risk, there are still institutions that will work with a person who is in the ChexSystems database. Frequently, these banks have a tiered process that they follow for individuals who pose a risk.
For example, if a person has been on the ChexSystems list for over a year, some banks will allow the individual to open an account with some form of collateral. This gives the bank physical security if the person skips out on the account with a negative balance. The collateral could then be sold to cover the balance.
Can I get my Name Removed from ChexSystems?
It is possible to get a name removed from ChexSystems if there has been a reporting error, or if the reason for being listed is minor (such as forgetting that you had an old account that was negative ten dollars).
While it is possible, it is time consuming and requires quite a bit of follow up. The first thing that must be done is to get a copy of all of the financial accounts in the customer’s name. A person is entitled to one copy of the ChexSystems record on themselves for free each year. Go through the record and look for any discrepancies.
If information in the report shows bad debt, negative accounts, etc. it is imperative to contact that particular banking institution. Once in contact, preferably with the bank manager, make arrangements to once again bring the account into good standing.
An individual, however, cannot request that their name be removed from ChexSystems database. The request must come from the financial institution that submitted your information to begin with. If working with a bank manager, this is something that can be arranged after the debt is paid.
However, be aware that just because the debt is paid or the account is brought back into good standing, the bank does not have to request ChexSystems remove the individual’s name. It is technically the individual’s obligation to clear the problem. The person does not necessarily get cleared just because they decided to show up and do what they should have done to begin with. This is considered the financial obligation of the consumer.
Most financial institutions are willing to work with an individual who does not have a history of gross negligence to the bank. If a customer moves and doesn’t close their account and it ends up negative, most banks want their money but can understand a general oversight. However, if a customer has bounced thousands of dollars in checks and still has outstanding NSF fees, the bank will be more resistant.
Will Non-ChexSystems Banks do a Credit Check?
If an individual is in the ChexSystems database and is looking for a non-ChexSystems bank, some of them do not do a credit check. To be honest, this is why so few non-ChexSystems banks still exist. While there are always some consumers who are trying to rebuild their financial history, there are those that are on ChexSystems because they attempt and get away with fraud.
For banks that do not use ChexSystems, they are putting themselves at risk. Because of this, many of these institutions will look at an applicant’s credit history to glean a sense of risk. If an applicant comes up on a credit report with delinquent accounts, no pays, and a large debt-to-income ratio, even non-ChexSystems banks may be wary about allowing an account to be opened.
Can I Open an Account Online without being Detected through ChexSystems?
The advent on online banking has created a whirlwind of activity. However, most banks will still run a prospective online account through ChexSystems. If a person is in their database, there is always the chance that their name will be caught.
Some people have tried opening an account online and sending in the deposit and signature card, only to have the deposit mailed back with the explanation that they do not meet that bank’s account guidelines. That being said, there are also instances where a person is in the database, but the bank randomly selects accounts to run through ChexSystems and they have been accepted.
Overall, when looking at the banking industry use of ChexSystems has become nearly 100% standardized. Though there are still banks and credit unions that do not use the ChexSystems, those institutions are becoming fewer and fewer due to the financial risk.
For individuals who find themselves in the ChexSystems database, there are ways to remedy the debt and account standing, but there is no guarantee that their name will be removed from the database before the 5 year time period is completed.
Today’s banks need to protect themselves, as well as consumers. Protection of financial credit is just as important as protection of consumer credit. By keeping good records and being responsible, it is possible to never experience the censure that comes with ChexSystems.