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Can Bad Credit Prevent You from Opening a Bank Account?
For lots of people, opening a checking or savings account at their local bank branch is seen as just another errand to run. You go in, you sign some papers, deposit a bit of cash, and then go on your way. Next stop: the grocery store.
But for people with bad credit, opening a bank account can be a slightly more nerve-wracking experience. Less running to the store and more going to the doctor to have that weird lump checked out. In both cases, the results they’re waiting for could have a serious affect on their lives.
So can a bad credit score prevent a person from opening a bank account? Well, not exactly. It won’t prevent them from opening a bank account in the same way that it prevents them from getting a loan or a credit card. However, the type of behavior that causes bad credit—overdue bills, missed or late payments, accruing more debt than you can handle—is also the kind of behavior that will prevent you from opening an account.
Here, let us explain...
Remember what “bad credit” actually means
It can be all too easy for us to throw around the term “bad credit” without stopping to remember its true meaning.
If you have “bad” credit, it means that you have a low FICO score—usually, a score that’s somewhere below 630. FICO scores come in a range between 300 and 850. The lower your score, the worse your credit. (A FICO score of 680-719 is generally considered to be a “good” score, and anything above that is “great.”)
Your credit score is determined by the information contained in your credit report. These are documents compiled by the three major credit bureaus: Experian, TransUnion, and Equifax.
Credit reports keep a record of how you’ve used credit over the past seven years—although some info on your report can stick around even longer. There are five factors used in calculating your score:
Your payment history, which makes up 35% of your score.
The total amounts owed, which makes up 30% of your score.
The length of your credit history, which makes up 15% of your score.
Your credit mix, which makes up 10% of your score.
New credit inquiries, which makes up the last 10%.
The more poor credit decisions you make—the more bills you pay late or credit card balances you run up—the lower your credit score goes. When lenders see a low credit score, they see someone who has a history of using credit poorly, which makes them a much riskier customer to lend money and would probably offer them a bad credit loan. (For more on bad credit loans, check out the OppU Guide to Bad Credit Loans here.)
How bad credit can lead to no bank account
The same is true for banks when you’re opening a checking account. If they see you as too big a risk, they aren’t going to let you open an account. As attorney Carmen Dellutri, founder of Dellutri Law Group, puts it, “Banks don't like to take risks, period."
The only difference is that the bank won’t check your credit score or pull a copy of your credit report from one of the three major bureaus. Instead, they will run a bank-specific version of a credit check, using a slightly different system to evaluate your creditworthiness. Rather than look at your history of borrowing money, the bank looks at your history of, you guessed it, using bank accounts.
They will most often run the check through a company called ChexSystems. “If you have made mistakes with banks in the past, you might have been put on the ChexSystems list,” says Dellutri. “Those mistakes could include a closed bank account without paying fees, bad credit, or other banking mistakes.” Additionally, an overdrawn bank account that is never paid up will end up being sent to a collections agency—which will show up on both your normal credit report and your ChexSystems report.
If you have bad credit, there’s a good chance that you’ve overdrawn your checking account or bounced a check or two in the past. The bank running the check will see this in your report from ChexSystems and may deny you an account. So while bad credit won’t directly lead to your being denied for a checking or savings account, the kind of behavior that leads to bad credit certainly will.
What to do if you’re denied a bank account.
It can be hard for many people to imagine not having a bank account, but it’s a hard reality for millions of Americans. A 2015 survey from the Federal Deposit Insurance Corporation (FDIC) estimated that as many as nine million households in the US were entirely “unbanked.” Going without a bank account means relying on check cashing stores, which can charge pretty exorbitant fees—all so that a person can simply access the hard-earned money in their paycheck.
That report also lists an additional 24.5 million Americans as “underbanked.” Finance expert David Bakke defines the underbanked as “people who have a bank account but rely on other methods of financing and payments, such as using money orders or payday loans.” Even if these people currently have a bank account, they likely have bad or “thin credit”—and are at a greater risk for losing the bank accounts they already have.
If you are denied a bank account, the first thing to do is to request a copy of your ChexSystems report. Here’s the good news: you can get a copy for free. Under federal law, you are entitled to request one free copy of your ChexSystems report every year. (The same holds true for your traditional credit reports.) All you need to do is visit their website. If there are any errors on your report, you should dispute them with ChexSystems. Likewise, if you have any outstanding overdue accounts or collections notices, get them resolved pronto.
Fixing your ChexSystems report is just like fixing your credit score. The best thing you can do is start making responsible financial decisions today. “Pay your bills on time and in full,” says Bakke. “Make sure you never bounce a check again by keeping a little more in your bank account than your register reflects.”
Even with black marks on your report, Dellutri says there’s a type of bank account that you might still qualify for:
“Many banks and credit unions offer 'second chance' banking accounts. These accounts might come with fewer services and higher fees, but they do allow you to open a bank account - and often you can become eligible for a regular account after six months of paying banking fees regularly and establishing a solid reputation with a bank.”
While bad credit might mean getting turned down for a bank account, it’s not the end of the world. By correcting errors on your ChexSystems report, making better financial decisions, and looking for a second chance account, you can work your way back to a standard bank account.
David Bakke (@YourFinances101) is a finance expert who started his own personal finance blog, YourFinances101, in June of 2009 and published his first book on ways to save more and spend less called ““Don’t Be A Mule…” Since then he has been a regular contributor at Money Crashers.