If you're denied a checking account, understanding and addressing the reasons why may result in a new application being quickly approved.
A checking account is a vital financial tool, useful for organizing everyday spending and payments. The bank will open a new account with a short application, and most applications are approved and processed quickly since there's no lending or risk involved for the bank.
However, for various reasons, usually having to do with the applicant's banking history, a checking account can be denied. When this happens, the applicant has the right to find out the reason by reviewing a copy of one or more reports that the bank relied on for its decision.
A financial institution will seek out new customers, so if you're denied a checking account, addressing the reasons may result in a new application being quickly approved. It can also take you several important steps down the road to improving your finances.
Can a bank deny you a checking account?
Banks are not required to provide accounts to applicants and denying a checking account is legal. A bank or credit union also has the right to close accounts if a customer mishandles them in some way that violates their policies and guidelines. Bankruptcy or an inability to verify a customer's identity has also resulted in account closure and denials for new accounts.
Banks screen checking account applications by using one or more risk assessment reports. The most popular of these reports is ChexSystems, a checking "debit bureau" which keeps a detailed record of any negative flags or issues that have arisen in your past banking relationships.
A ChexSystems report identifies any suspected fraud, as well as negative information such as a bounced check or an overdraft. The report also lists all inquiries, meaning banks, retailers, or other companies that have requested a copy of the report for whatever reason.
ChexSystems is not a credit bureau or a collection agency, so not all credit and payment information is included. The company only deals directly with banks and credit unions. It does not run a credit check like a credit bureau, so it will not affect your credit score, but it may review your credit report.
The company will not contact banking customers or demand payment for correcting or removing report information. Proceed with caution if you encounter any company that claims to be a credit repair specialist and charges for making improvements to a ChexSystems report.
Why banks deny checking accounts
For banks, the ChexSystems report will show any bad news about a potential customer. This may include one or more of the following events:
Any checking or savings account closed over the past few (typically five) years, with information on money owed by the account holder for fees or overdraft charges. If you've closed a checking account and left a negative balance for any reason, that will show up on the report.
The number of account applications in recent years. In the bank's view, a high number of applications indicates a riskier customer.
Any checks returned for insufficient funds within a given period, such as the past four years.
The number of check orders made by the customer over the past few years. Ordering a lot of checks is a red flag for banks, especially in these times of electronic payments and regular debits from bank accounts that don't require paper checks.
Note that each bank can set its own guidelines for potential customers. One bank may be quite strict about setting a five-year period for overdrafts, while the next may let any overdrafts more than a year-old slide. Another may just want to ensure that overdrafts were paid without any collection action, as "mistakes happen" to good customers as well as risky ones.
Telecheck and Early Warning Services are other risk assessment services used by banks that provide similar information. Your bank may use one or more of these bureaus and a conventional credit report to evaluate you as a potential customer. You have the right to inquire what reports the bank uses before filing the new account application.
What to do if you can't open a bank account
If you've been denied a checking account, there are steps you can take to learn why your application was denied.
By federal law, ChexSystems is required to provide a copy of its report to the consumer when an account is denied. In addition, you can request a copy once a year in the normal course of business. Navigate to the ChexSystems website to request a copy by phone, through an online form, by fax, or by mail.
Review the report carefully once it arrives and check for any errors. There may have been a mix-up in your identity: someone applying for an account, for example, using your name and Social Security number. Alternatively, the reporting bureau may have your information combined with that of another consumer.
A reported issue may have been resolved long ago, with the bank neglecting to report the payment of a fee or charge or a negative balance being resolved.
Human error is a common reason for mistakes in any big set of financial data. ChexSystems and similar agencies have a dispute process in place that allows you to request a correction.
If the problem is an unpaid overdraft or fee, you may have the opportunity to pay whatever is owed to the charging bank to satisfy the debt and get the flag removed from the report. Not acting on the charge means you'll have to wait for the flag to simply "age off," which, again, in the ChexSystems report means a period of five years after the date of the incident.
How to get a new bank account after you're denied
If your application for a checking account is denied, you may have options available. Some banks and credit unions offer what's known as second chance banking. These accounts don't use ChexSystems or other agencies to screen applicants. They'll accept a “risky” customer in the hopes of keeping them as a long-term source of new business and revenue.
The downside of a second chance account is that it may have limitations and costs. Some will require a minimum balance, while others may not issue paper checks or allow check writing. You may not have overdraft protection available and may incur a steep overdraft fee. It's also common for banks to charge a monthly fee for these accounts.
Few of the larger national banks offer second-chance checking, so you may have to turn to a smaller, local bank to get that account opened. After a year or two of good management on the customer's part, the bank may simply convert a second-chance account to a regular checking account, with lower fees, fewer restrictions, and the full range of convenience services.
Steps to take before reapplying for a checking account
It's important to review your credit report regularly as well as the ChexSystems report. Experian, Equifax, and TransUnion are the three major credit reporting agencies. Overdrafts can be reported to these companies, and a bank may pull one or more of the credit bureau reports as well to check your credit score before approving an account application. According to the Fair Credit Reporting Act, you have the right to a free copy of the report once a year.
Ensure that the information on your credit history is accurate, then take steps to improve your credit score, which is based on several factors. Late payments, too many accounts or loans applied for, high balance-to-available-credit ratios, and other problems will bring down that score. You can raise the score by:
Bringing your credit accounts up to date
Closing those loans or credit cards you don't need or use
Paying more than the minimum due each month
Even if you find yourself in the category of "high-risk customer," it's good to remember that the problem can be overcome with patience and diligence. Take the opportunity to start a monthly budget, repair any bad credit flags, or get credit card payments set up automatically so that payment deadlines aren't missed. Getting your finances in order can be work, and it is an accomplishment to be proud of. Treat your money with pride and assert your worth as an account holder by aiming for a positive payment history that will allow you your choice of checking accounts — especially free ones that earn rewards as you use it, like free Kasasa rewards checking.
Improving a poor credit score on your credit report can pave the way to a much-improved financial future.