A bank account is essential to keeping your money safe. But if you have a history of bad credit, some banks might not allow you to open a bank account.
Should you find yourself in this situation, there’s no need to worry. You can still open what’s known as a second-chance checking account with bad credit at some banks and credit unions across the country. These are checking accounts that work just like regular checking accounts but without some services such as overdraft allowances and checks.
In this article, we show you how to open a bank account no matter what your financial credit status might be.
- Bad credit is usually defined as having a financial history of unpaid bank fees, unpaid overdrafts, bounced checks, defaulted loans, and late utility bill payments.
- Customers with bad credit can open second-chance checking accounts if major banks do not approve their bank account applications.
- These accounts tend to have higher-than-average monthly maintenance fees and minimum balance requirements. They may also not give customers additional banking products such as debit cards and checks.
Why is bad credit a problem?
Bad credit can have serious consequences for your financial health, especially when it comes to opening a bank account. Before banks can approve new bank accounts, they are obliged to conduct background checks on prospective customers to make sure that they can manage their money responsibly.
Banks look for records of poor financial management, such as bounced checks, late payment of utility bills, and bankruptcy filings. A history of bad credit tells a bank that the prospective customer could pose a fraud or default risk to them.
More importantly, banks don’t want to open regular checking accounts for customers with bad credit because they are worried that these customers might overdraw their accounts and fail to repay the overdraft fees.
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How do banks check your credit?
Banks check your credit history through a variety of national consumer reporting agencies. The most commonly used report when processing checking accounts is the ChexSystems Consumer Disclosure Report that grades a person’s banking history from 100 to 899. Other agencies such as Telecheck also provide similar reports.
The ChexSystems report is conducted using the prospective customer’s social security number, which has to be provided to the bank during the application process along with their age, current address, and proof of identification. It takes about five days for the bank to request it.
Recent data suggests that more than 80% of banks in the U.S. use ChexSystems to screen checking account applications. Banks often use ChexSystems reports because they contain all the negative details of a person’s banking history.
The details in a ChexSystems report are kept on file for five years from the time they are recorded before being deleted. This includes everything from account freezes to unpaid bank fees to excessive withdrawals.
But despite their widespread use, ChexSystems reports show only negative financial histories. For customers who may have multiple bank accounts in good financial standing but one with a bad credit history, this could lead to an unfair financial assessment by the bank.
Also, a ChexSystems report is separate from credit scores such as the FICO score, which tracks your history as a borrower. A FICO score is compiled using information from the three major credit bureaus: Experian, TransUnion, and Equifax. Even though you might have a good FICO score, a poor ChexSystems report could prevent you from opening a bank account.
What bank account can be opened with bad credit?
People who are denied a regular checking account because of bad credit can open what’s known as a second-chance checking account. This is a type of checking account that offers similar services to regular checking accounts but without some major perks such as overdrafts and checks.
Second-chance checking accounts are offered by major banks such as Wells Fargo as well as smaller financial institutions like credit unions and community banks. Most of these accounts tend to have higher maintenance fees than regular accounts.
But if customers use second-chance checking accounts responsibly – by not missing any fee payments for example – they may be allowed to graduate to a fee-free regular checking account in six to twelve months.
For some people, second-chance checking accounts may be limiting in that higher minimum balances are required to keep the accounts open. A few banks may also not issue checks and debit cards to account holders. While second-chance checking accounts can help customers improve their banking history, they won’t help you rebuild your credit score.
That said, second-chance checking accounts are pretty easy to open as long as you don’t owe the bank that you’re applying to any money. Approval rates are generally high and they’re a great place to start if you don’t want to wait years for your ChexSystems financial report to clear up.
How can I open a second-chance checking account?
Opening a second-chance checking account requires just a few simple steps. Here’s how you can open a bank account with bad credit.
Find a second-chance checking account that offers features that meet your needs
The first thing that you should do is shop around for a second-chance checking account that you can afford in your current financial situation.
The best second-chance checking accounts come with features that help you ease back into banking. These accounts will usually have low or no monthly fees under $5 per month plus few limits on daily and monthly transaction amounts.
They will also offer services such as debit card access and online bill payments without any extra charges. Some banks and credit unions may refer to second-chance checking accounts as Opportunity Checking and Fresh Start Checking.
Get in touch with the banks to ask what their application requirements are for their second-chance checking accounts
After you’ve chosen the 3-5 best account options that meet your needs, contact the banks to ask for additional information that will help you narrow your search down to the very best option. The most important things to know about a second-chance checking account are its overdraft allowance, savings account requirement, and hidden fees.
Some second-chance checking accounts may not allow overdrafts to prevent account holders from abusing their funds. Others may charge very high overdraft fees to deter customers from drawing overdrafts in the first place.
In some places, banks may even require customers to open a savings account first for a few months to monitor their banking habits. Only when they’ve determined that the customer can be deemed trustworthy will they allow them to open a second-chance checking account.
Hidden fees are also another thing to watch out for. You could be charged extra fees for requesting paper statements, using online services, or letting your account go dormant for a certain period.
Open your second-chance checking account
Once you’ve selected the second-chance checking account you want to go with, you’ll need to prepare a photo ID, your social security number, and money for the minimum opening deposit.
Some banks will require you to present these in person at a bank branch during the account registration process. Others have the option for you to get them processed online. Second-chance checking accounts should take no longer than a week to open.
Keep building a good financial record until you graduate to a regular checking account
Many banks will allow you to upgrade to a regular checking account if you can show within six to twelve months that you can manage your finances responsibly. This means paying bank fees and utility bills on time and maintaining the minimum account balance as required.
Some banks may even refund the monthly account maintenance fees if you meet all of their conditions within these twelve months.
How to get rid of your bad credit history
Even after you’ve received your second-chance checking account, it’s a good idea to try and get rid of your bad credit history. Knowing what’s on your ChexSystems report can help you tackle each negative record one at a time and resolve any outstanding disputes you have with your old bank(s).
The first place to start is to order a free copy of your ChexSystems Consumer Disclosure Report online or by phone at 800-428-9623. Everybody is entitled to order one free copy by law every year. When you receive your report, check it for unpaid fees, debts, and overdraft amounts. Pay them wherever possible to take these items off your report.
More complicated past financial mistakes, such as bounced checks, may, unfortunately, be difficult to resolve and will need to be left until ChexSystems clears it from their file after five years.
Open an online bank account with no credit check
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We offer high-yield savings accounts that offer up to 1.00% APY. We don’t charge any hidden fees, instead provide up to 10% cashback on purchases from our Conscience Coalition partners, which include TOMS, Blue Apron, and Warby Parker.
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