Editorial Policy

ChexSystems tracks bank account misdeeds

Allie Johnson

October 15, 2014

You probably know the three major credit bureaus (Equifax, Experian and TransUnion), which lenders depend on to evaluate your creditworthiness, but you also should be aware of ChexSystems, a consumer reporting agency that could bar you from opening a bank account.

When a bank closes an account for a reason such as an unpaid negative balance, fraud or habitual check bouncing, the bank might report the matter to ChexSystems. The report stays on file for five years, according to the agency's website for consumers, ConsumerDebit.com.

About 80 percent of banks use that consumer reporting agency to screen consumers who apply to open a checking account, according to Chi Chi Wu, staff attorney at the National Consumer Law Center.

Banks might use information from the agency to recommend a product for a consumer — such as a basic checking account designed to help with money management — or they might use it to deny a new account, says Nessa Feddis, senior vice president at the American Bankers Association.

A consumer who hasn't had a bank account closed may have a file with ChexSystems that states the agency has no reported information. In a separate section, the file might list recent inquiries, such as those made by a bank after the consumer applied for a bank account or credit card, according to ConsumerDebit.com.

Any other reported information would be negative, says Edmund Mierzwinski, consumer program director for the U.S. Public Interest Research Group. Unlike the credit bureaus that report accounts paid on time, this agency does not collect any positive reports on consumers, he says.

Having a negative report on ChexSystems has often meant being blacklisted from mainstream banking for years, but that might change, Mierzwinski says. This year, Capital One Financial announced it will stop using information from the agency to deny new accounts to consumers who have had trouble managing past accounts.

“That's a major step forward,” Mierzwinski says.

What ChexSystems is designed to do

Imagine this: A fraudster knows her checking account is empty, but goes all over town writing checks for gourmet groceries, a designer purse and her dog's vet bill. When the checks bounce and her checking account gets closed, she just goes to another bank to open a new one.

That's that kind of fraud that ChexSystems was initially designed to prevent, experts say.

“It's basically one of the few sources banks have to determine what somebody's past history is with a checking account,” Feddis says. “And past behavior can be predictive.”

But, not everyone is a fraudster, Mierzwinski says. Consumers can get banished to “fringe banking systems” such as check cashers and payday and car title lenders due to being in the ChexSystems database, he says. “It's a mess for consumers.”

In fact, Wu says, some bank practices, such as pressuring consumers to opt into expensive overdraft protection, then charging $35-a-pop overdraft fees, or changing the order of how transactions post to maximize fees, have contributed to consumers getting a negative report in the database.

But, ChexSystems is governed under the rules of the federal Fair Credit Reporting Act, Wu says. So, if you're denied an account due to a report in the database, the bank must send you a letter telling you that, she says. You also have the right to an annual free copy of your CheckSystems report. If you find incorrect information, you can dispute it, and ChexSystems is required to investigate, she says.

How to steer clear of negative ChexSystems reports

But, consumers shouldn't worry too much: Bouncing one check will not land you on the blacklist. Feddis says. Neither will having a negative balance for a short time, as long as you deposit funds to bring it back into the black, experts say. “There's a lot of confusion,” Feddis says.

Wondering how to avoid getting reported to the ChexSystems database? Here are four tips:

  1. Watch your account closely. The best way to keep your account in the black and stay off ChexSystems is to manage your accounts well, experts say.
  2. Be careful with checks you deposit. If you deposit a check and spend the money, then the check bounces, you have to repay the bank, Feddis says. She recalls that one consumer got in the news when she ended up on ChexSystems after selling a computer to a friend for $1,000. When the friend's check bounced, the woman had spent the money and refused to repay the bank, Feddis says. So, be careful about who you take checks from. She recommends waiting two weeks before spending money after depositing a check from a stranger.
  3. Don't close a bank account too soon. Say you're moving to California, you close your account, and then one check you forgot about hits the old account, Mierzwinski says. Suddenly, you have a negative balance and, if the bank has trouble reaching you to get you to settle up, you could end up getting reported to the agency, he says. To avoid that situation, leave your old account open for at least 60 days after you stop using it to make sure all items have cleared.
  4. If you can't afford to pay what you owe, talk to your bank. The worst thing you could do is just to leave your account in the negative because you can't afford to pay what you owe. If you do that, the bank might close the account and report you to ChexSystems. Instead, negotiate the fees, Mierzwinski recommends. “Penalty fees sometimes get piled on consumers by computers, but can be eliminated by managers. But, the consumer has to go in and push back,” he says.

“Banks will work with you,” Feddis says.