Dear Two Cents,
I'm finally in a position to start saving some money. I now have an adequate emergency fund, and I'd like to eventually get started with basic investing. But for now, I want to earn interest on my emergency fund, as it's currently just sitting in a low-yield savings account.
When I tried to open a high-yield savings account at a major bank, I was denied. I also tried to open an interest checking account at the same bank. Again—denied. Is this because of my bad credit history? If so, how can I open an account and move forward with my finances when my credit history sucks?
Sincerely,
Credit Conundrum
Dear Credit Conundrum,
I can imagine your frustration. It sounds like you've improved your money habits, but your old financial issues are now haunting you. This can be a for many people. Here's why you might have been denied, and what you can do about it.
Learn How the Bank Approval Process Works
If you have bad credit, you can be denied a checking or even savings account at certain banks. But banking site My Bank Tracker explains that the rejection doesn't stem directly from your credit report but from something called a ChexSystems report.
When you apply for an account, here's how the bank approval process usually works, according to the site:
"In a typical account application process, the bank uses your name and Social Security number to conduct a routine financial background check. The very first step in this background check is usually taking a look at your ChexSystems report. The information included as part of the ChexSystems report reveals any bad consumer banking history such as outstanding overdrafts or bad checks you have written. Other information reported includes security alerts or freezes."
More than 80 percent of commercial banks and credit unions in the U.S. have access to this report. And almost all of those that have access will pull it, My Bank Tracker says. According to Credit Karma and Bargaineering, the ChexSystems report can include:
- Bounced checks
- The number of financial institution inquiries
- How many checks you've ordered
- Instances of check fraud and identity theft/fraud
- Unpaid negative balances
- Excessive withdrawals
There's a good chance a bank will reject your application if there are negative hits that are recent, outstanding or seem to reflect bad financial habits. Money for 20s says that most banks won't let you open an account until these hits are cleared from the report.
According to About.com, most banks don't check your regular credit reports, but that's not to say it doesn't happen, too. My Bank Tracker explains:
"Depending on the financial institution, a credit check may or may not be used to approve your application. Again, any delinquencies and red flags will show the bank that you are unable to manage money responsibly."
Now that you know how the approval process works, the next step is getting your hands on that elusive ChexSystems report.
Check Your ChexSystems Report
Ordering your report is pretty straightforward, according to Bargaineering. You can request it here, and you'll need to be ready with the following:
- Your current address
- Your Social Security number
- The address of residences from the past five years
After filling out a form, the report will be mailed to you within five business days. The site offers a sample report, too. Some snippets from the sample are below.
Try to Resolve Your Issues
Once the report is in your hands, you can find out exactly why you were denied. You can see which banks reported you, and why. Quicken Loans suggests contacting the reporting banks to see if you can fix your issues.
"If you owe a bank or multiple banks money, you'll need to pay up and ask them to remove their ChexSystems report on you. After paying off your debt(s), banks have the option to decline removing your name from the ChexSystems report, although they must report to ChexSystems that you paid off your debts."
This isn't always possible. If you've bounced some checks, for example, chances are, that's going to stay on your report. But it's worth checking to see if it's a fixable issue.
Dispute Errors
You might find there are errors on your ChexSystems report. Account Now offers a step-by-step guide to doing this. You should check out the link for more detail on this, but it generally involves:
- Checking your report thoroughly
- Writing ChexSystems a letter, informing them of the dispute. Include supporting documents and explain the dispute in detail
- Sending the letter certified and requesting a return receipt
You might also consider disputing with the financial institutions directly, the site adds.
Find Out When Your Open Issues Will Expire
Let's say there are issues on your account that you can't resolve or dispute. Unfortunately, those issues can take about five years to clear, according to money site Quizzle.
They report:
"Once a bank files a report on a customer's name with ChexSystems, it is unlikely that that person will be able to get another checking for about five years...ChexSystems has its critics... Since it's difficult to erase a black mark on a ChexSystems report, many good customers claim that they've been excluded from the ability to obtain new accounts for trivial reasons."
If you've got items on this report that you can't do anything about, you should find out when they were reported, so that you know how long you'll have to live with them.
And, of course, in the meantime, you should keep on trucking with your good financial habits. Obviously, this will prevent more issues from popping up on the report.
Ask the Bank to Reconsider
If you've been denied, it can't hurt to ask the bank to reconsider, the FDIC reports.
"Every bank decides for itself how to evaluate the information in a consumer's report...While banks might use information from a reporting service to make a decision, the service itself does not approve or reject account applications, so you might be successful in getting the institution to reconsider its decision and allow you to open an account."
Consider a Credit Union or Local Bank
If there's an upside to 80 percent of banks using ChexSystems, it might be that 20 percent don't use it.
Consider opening an account at a smaller, local bank or credit union, My Bank Tracker suggests. And while you're considering one of these institutions, you might as well ask if they check ChexSystems before they actually run your application. In fact, it might be helpful to ask if they'll pull your standard credit report, too. Here's why:
"You don't want to apply and have them reject you because these inquiries will show up on your reports. Also, credit unions are usually more lenient when it comes to negative marks on your reports."
From your question, it sounds like you're mostly concerned with earning interest on your savings. Many credit unions have higher interest rates than traditional banks. Personal finance editor Mandi Woodruff confirms this when she explains some advantages of credit unions:
"With a credit union...you are more likely to see lower fees, get slightly higher interest rates, and experience better customer service."
Check out Woodruff's full post for more credit union pros and cons. Bankrate also offers a helpful list of high-yield interest accounts at credit unions.
For more detail, check out our post on how to find a good local bank. We've also discussed the process of switching from bank to credit union.
CheckingFinder is also a great way to compare banks' interest rates and other perks.
Opt for a Second Chance Account
With a poor credit history and ChexSystems report, some people find it difficult to open a checking account in general, much less a high-yield account.
This solution may not apply to your question, but for anyone who might be challenged with opening a checking account: some banks offer Second Chance accounts for those with a poor credit and banking history.
With these accounts, the application process is more lenient. But keep in mind—your approval might come at a cost. John Ulzheimer, CEO of SmartCredit.com, tells CNN that the trade-off with these accounts is that they come with high fees. For example:
"Wells Fargo's version of a second chance checking account, Opportunity Checking, comes with a $10 monthly fee that can only be waived with three or more qualifying linked accounts or services (like a debit card or savings accounts), and by either maintaining a $2,000 minimum daily balance or making direct deposits of at least $750 per month."
With this example, the good news is, after a few months, the bank reviews your account, and you might be able to graduate to a standard account.
For Investing, Sign Up for a Brokerage Account
You probably don't want to invest your emergency fund. But once you're ready to think about basic investing, you shouldn't have too much trouble opening a brokerage account. Reportedly, most brokerage accounts don't use ChexSystems. According to Bad Credit MD, E-Trade, for example, doesn't pull applicants' ChexSystems reports. And eHow further explains:
"Brokerage accounts such as E-Trade and Scottrade offer checking accounts to anyone with proper identification and a deposit. They offer checks and debit cards for the accounts along with direct deposits and transfers."
It can be hard to get ahead with your finances when you still have to pay for your past mistakes. You're on the right track—you're trying to stash your emergency fund in the best place, and that's smart. Keep focusing on your good financial habits, and, eventually, the good will outrun the bad.
Good luck,
Two Cents
Two Cents is a new blog from Lifehacker all about personal finance. Follow us on Twitter here.
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