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Does your banking history include unpaid fees such as overdue overdraft fees or bounced check fees? If so, it’s possible that banks may deny your application to open a checking account.
But you still have affordable options for managing your money, and you could put yourself in position to eventually qualify for a regular account again. Here's how.
Check your ChexSystems report
If a bank or credit union closed your old account because of unpaid fees, you might have a record with ChexSystems. ChexSystems is a consumer reporting agency that banks can check when vetting a potential new customer to see if that person has a history of unpaid fees or other banking history concerns.
Steven Hughes, an entrepreneur in Columbia, South Carolina, says he applied for a checking account a few years ago, and a bank told him he couldn't open one because of his ChexSystems file.
"I made a lot of financial mistakes when I went to college several years ago," Hughes says. "I bounced checks and had a lot of overdraft fees. The fees became too much for me to pay, and my old bank closed the account."
Hughes contacted ChexSystems and asked for a copy of his file. Then he reached out to his creditors to settle his debts. Under the Fair Credit Reporting Act, you have a right to ask ChexSystems for a free copy of your file if you're denied a bank account. You can also request a free copy at least once every 12 months. If there's an error, you can dispute the information and ask the company to remove it. Otherwise, ChexSystems keeps valid information in your file for five years.
Ask to remove settled debts
If you pay off your outstanding debt earlier than the five-year mark — and, of course, you should if you can — the ChexSystems record will be updated to show that you have paid what you owed. The negative file doesn’t automatically disappear, but you or your former creditor could ask ChexSystems to delete it.
Hughes says he sent ChexSystems receipts to prove his debt was paid. The negative mark was then removed from his file, well before the five-year time frame. “After that, I had no problem opening a new bank account," he says.
Apply for a second chance checking account
About 20% of banks offer alternative checking accounts, known as second chance checking, for people who don't qualify for a standard account, the Federal Deposit Insurance Corp. says.
Second chance accounts usually don’t have the same perks as standard checking, such as overdraft protection or waivers for monthly service charges. The monthly fees generally range from $10 to $15. That’s not ideal, but it’s still cheaper than other alternatives, such as using a check-cashing company to deposit paychecks. Those services can cost up to 10% of the value of the check.
The best second chance checking accounts have no minimum balance requirements and offer debit cards and online banking for free. And if a year or so goes by without any negative balances or other problems, customers can usually upgrade to a better checking account.
Temporarily use a prepaid debit card
If you're not able to open even a second chance account, consider using a reloadable debit card while you work on paying off debt. This type of prepaid card lets you take advantage of some banking functions, such as paying bills and transferring money to other people, without the need for a checking account.
Customers can also deposit checks into special accounts linked to prepaid cards by using ATMs or mobile banking, sometimes for free. It’s a good idea to consider the size of a card’s free ATM network to help you avoid out-of-network charges. You’ll also want to look for a card that has fraud and purchase protection.
You can order prepaid debit cards online, sometimes for no fee, or pay around $5 at local retailers. The better cards don't charge monthly fees — or, if they do, the fees are under $5 a month. Some card issuers will waive the monthly charges if you sign up for direct deposit. You can use a reloadable card now and apply for a checking account in a few months, after your ChexSystems record improves.
With these alternatives, there's no reason to stay “unbanked” for long. You can use affordable alternatives and start taking steps today to clear your banking record.