ChexSystems: The Banks’ Secret WatchDog is Watching You

Have you ever been turned down for a checking account? While denials are more common when applying for credit, you can also be declined when applying for a bank account. If you have been declined, it’s likely due to a reporting agency that many have never heard of, but who has a lot of information about and influence over banking customers. It’s called ChexSystems.

Most have heard of the three major credit reporting agencies–Experian, Trans Union, and Equifax. But there is a lessor known but equally important reporting agency for checking accounts called ChexSystems. Run by Chex Systems, Inc., ChexSystems provides account verification services to its financial institution members to aid them in identifying account applicants who may have a history of account mishandling (for example, people whose accounts were overdrawn and then closed by them or their bank).

Well take a look at ChexSystems and how it works. Then we’ll look at how you can get your ChexSystems report.

What is ChexSystems

Like the major credit reporting agencies, Chex Systems, Inc. is a consumer-reporting agency governed by the federal Fair Credit Reporting Act (FCRA). Much like a creditor can report late payments or charge-offs to a credit reporting agency, a financial institution may report NSF (non-sufficient funds) or overdrafts to ChexSystems.

Information reported by banks to ChexSystems typically stays in the system for five years. Items are only removed before the expiration of the five year period if the reporting financial institution requests the item to be removed or applicable law requires ChexSystems to remove the derogatory item.

Items also remain in the system for five years even if the banking consumer has paid the item. For example, a bank may reporting an overdraft to ChexSystems before the bank customer has paid the item. If the customer thereafter pays the item, the overdraft still remains in the ChexSystems’ database. The reporting institution, however, should notify ChexSystems that the item has been paid.

What information is reported to ChexSystems

As noted above, one of the most common items reported by banks to ChexSystems is a customer’s overdraft or NSF transaction. In addition, the ChexSystems contains identifying information about banking consumers, including social security numbers and driver’s license numbers. If an identity theft has been reported or a security freeze has been placed on the account, the ChexSystems database also will note this information.

The ChexSystems also notes inquires initiated by consumer action (e.g., applying for a bank account) and those not initiated by a consumer action (e.g., current creditors, potential employers). Finally, ChexSystems can include information reported by retailers through Shared Check Authorization Network (SCAN). SCAN is a comprehensive database of bad check writers in the United States. Participating retailers can obtain a customer’s history of bad checks, if any, and then make a decision on whether to accept their check. This information is also reported to ChexSystems.

How to Avoid the ChexSystems

Because ChexSystems can prevent a consumer from qualifying for a checking account, it’s important to avoid the common mistakes that can trigger a ChexSystems report. Of course, intentional overdrafts or bad check writing will certainly result in a ChexSystems report from a financial institution. But there are also some common mistakes that people make that can risk a negative report.

Here are some of the common mistakes to avoid according to ChexSystems, along with their recommended solutions:

  • Forgetting to stop automatic payments from being taken out before closing an account: Make certain to identify all automatic payments and discontinue them before closing your account. If you do not, you could face steep fees, even after the account is closed. When you request payments to stop, be sure to ask the company how long it will take to process your request. Often companies can take up to two weeks to make your requested payment change. In the meantime, additional payments could be deducted from your account.
  • Closing your checking account by letting it go to a zero balance: Always contact your financial institution if you wish to close your account. If you do not formally close your account, fees may be charged even after the funds in the account are depleted. Then you will have a negative balance in your account and possibly overdraft fees, which you will be responsible for paying to the financial institution.
  • A check you deposit in your account does not clear or bounces, causing the account to go into overdraft: Just because you have deposited the check does not guarantee the check has the funds to support it. When depositing checks, allow enough time to make certain the check clears (usually 3-5 days, depending on the institution) before writing checks against the balance.
  • You wrote a check for more than you have in your account: It is very important that you balance your checkbook regularly so that you always know your account balance. If you discover that you have written a check for more than you have in your account, immediately deposit funds to cover the amount of the check and any associated overdraft fees.
  • You co-signed on an account that was abused by the other party: Be very cautious when agreeing to have a joint account or becoming a co-signer on someone else’s account. Regardless of which signer mishandles the account, both signers may be held responsible.
  • You gave your PIN (Personal Identification Number) to someone else and they took funds from your account without your authorization: Never give your PIN to someone else. It is like opening the door to your finances. Inform your financial institution of the situation. They may suggest that you change your PIN or they may suggest that you close the compromised account and open a new one.
  • You post-dated a check and it was cashed too early: Post-dating checks is dangerous because there is no legal obligation for the other party to hold the check. You are simply relying on the other party to wait to cash the check on the post date. If the check is accidentally cashed early, you are responsible. It is best to wait to write the check when you have the money available in your account.
  • You’re not receiving statements or correspondence from your financial institution: If you have moved or changed names, it can sometimes take time for your mailed account statement to catch up with you. Always notify your financial institution when there are changes to your personal information. Not knowing the status of your account does not excuse you from being responsible for it.
  • You discover an account or handling error by the financial institution: Financial institutions make mistakes too. Errors, such as posting to the wrong account number or unauthorized withdrawals, have been known to happen. It is important to review your financial institution statements and receipts closely for inaccuracies. Bring any questions or errors to your financial institution’s attention immediately. The sooner you do, the easier it is for the financial institution to correct them.
  • Your checks are lost or stolen: If your checks are lost or stolen, report it immediately to your financial institution. Stopping payment on checks BEFORE they fall into the wrong hands is much easier than after someone has falsely written checks against your account. See check fraud for additional information.

For those that can’t get a checking account, a low cost prepaid card that offers direct deposit is a great alternative. One of the top prepaid cards is the Vision Premier Prepaid Vision Card, which comes with no activation charge or weekly fee if the direct deposit feature is used.

How to Request your ChexSystems Report

Finally, if you think you may be in the ChexSystems, you can request your report. Just as you are entitled to your credit report every 12 months, you are also entitled to your ChexSystems’ report.

Published or Updated: June 18, 2011
About Rob Berger

Rob founded the Dough Roller in 2007. A litigation attorney in the securities industry, he lives in Northern Virginia with his wife, their two teenagers, and the family mascot, a shih tzu named Sophie.

Comments

  1. Larry Johnson says:

    It is possible to open a checking account even if your ChexSystems report is not perfect. Some financial institutions will offer you a second chance if you complete an education course designed to teach you the why’s and how’s of managing your new account. Ask your local credit counseling agency or search online for a program called “CheckWise”.

  2. StopChex says:

    You’ve provided some excellent information about ChexSystems! It’s amazing how many people end up with ChexSystems problems. Unfortunately, many banks are getting even stricter with their denial of new accounts based on ChexSystems information, as they try to increase their profits.

  3. Sue says:

    I recently had a snotty little clerk at my bank of 5 years shut my account down because she got her widdle feelings hurt when I told her she was full of it so now out of total spite she not only froze my account but also shut it down totally and sent me a letter the other day telling me I was being reported for FRAUD to this place.

    What happened was this: I am an independent contractor and I provide accounting services to various small businesses (yeah I know, total irony) and one of my clients are an elderly couple in their 80’s. The wife wrote me a check for my weekly accounting on a Friday afternoon without knowing that the husband was down at the bank closing the account so that he could get the former bookkeeper off of it. When the check bounced out of my account back to theirs this little with called me accusing me of FRAUD! I naturally got a little um testy, shall we say and that’s when she player her power trip with all of this. The bank never even bothered (US Bank) to call the people who wrote me the check OR to call the other bank to verify what I had told them was true. If they had, this would have all been done and over with but as it stands now my US Bank account is going to be reported to this ChexSystems for no legitimate reason other then one immature clerk playing a power trip. Do I have any recourse to get this stricken off of my account with ChexSystems?

  4. john says:

    U.S. Bank is as bad as they get. I’m in CS for “Account Abuse.” Tried to get an explanation, they couldn’t. Tried to get them to send “verified” information, they wouldn’t and I tried to get them to explain how they went about verifying information. Nothing was provided.

    Scew em. I filed a lawsuit against Chex Systems, Inc. am looking for $10,000.00. I’m sure…Account abuse. I kicked and spit on my account…

    We’ll see how this goes and I’ll report back.

  5. Z10r says:

    I was put in CS for no legitimate reason. I’ve sent four USPS Certified letters to them and I have tangible proof that they have violated federal law. I just filed a small claims case against them. I should have filed one from the begining and this all would have been over almost a year ago. Anyway, they will not listen to you if you SHOW them what law they violated and PROVE it to them. They just don’t care. I guess they are threatened with law suits every day. You just have to show them who’s boss. SUE THEM RIGHT AWAY. I don’t even expect them to show up in court all the way in California. It wouldn’t surprise me if they contacted me and settled out of court. I told them in my last letter I would NOT settle if I file the case… I’m going to be paid for my trouble with this company and I’m going to teach them a lesson. EVERYONE IN CHEX SYSTEMS SHOULD SUE RIGHT AWAY. Here is one of the laws they most commonly violate and did in my case – I disputed my listing and they NEVER updated to say “customer disputes”… they had 30 days to do so by law, and never ever did even after almost a year!

    Section 623(a)(3) of the Fair Credit Reporting Act:

    § 623. Responsibilities of furnishers of information to consumer reporting agencies [15 U.S.C. § 1681s-2]

    (a) (3) Duty to provide notice of dispute. If the completeness or accuracy of any information furnished by any person to any consumer reporting agency is disputed to such person by a consumer, the person may not furnish the information to any consumer reporting agency without notice that such information is disputed by the consumer.

    Section 807(8) of the Fair Debt Collection Practices Act:
    § 807. False or misleading representations [15 USC 1962e]
    (8) Communicating or threatening to communicate to any person credit information which is known or which should be known to be false, including the failure to communicate that a disputed debt is disputed.

    SUE THEM EVERYONE, THEY WILL SETTLE OUT OF COURT! IT ONLY COSTS ABOUT 20$ TO FILE IN SMALL CLAIMS COURT! DO IT!

  6. Dan says:

    If they are not in your state, how do you have them served ?

  7. TheChexSystemsGuru10 says:

    Stopcheck is right. My son got booted out because of 1 bounced check that wasn’t paid. He really got sick of using those pre-paid cards. After 1 year he had to get a new account for business and still he couldn’t get an account anywhere in town, but finally found one here that didn’t use chexsystems or run a credit check.

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