What Is ChexSystems And How Does It Impact My Credit?

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chexsmallThere are very few of us out there who haven’t made a mistake or two with our checking accounts. Usually, these arithmetic errors result in getting hit with an overdraft fee, a few foul words, payment of the fee, then moving forward with the account. I myself have paid more overdraft fees than I’d like to count, especially in my college days when my average monthly balance hovered around $10 and even the slightest hiccup sent me into the red. Oh, the folly of youth!

It turns out, though, that some checking account holders try to avoid paying the overdraft fees they incur from overdrawing their accounts by closing the accounts down and moving on to another bank. The initial account balance remains negative – that is, the customer owes the bank money – but often the customer just continues to dodge calls and other requests for action from the bank in order to keep from forking over the cash to settle the account.

Normally, when a consumer fails to pay a bill, their name and the amount they owe is turned over to one of the major credit reporting agencies such as Transunion or Experian. This system works well for consumers’ credit accounts, such as mortgages and auto loans, but doesn’t translate well to non-credit accounts, such as checking or savings accounts held with a typical bank. This is where ChexSystems comes in.

ChexSystems is classified as a consumer credit reporting agency, and as such it serves as a way for banks to identify customers who have a history of fraudulent or abusive behavior with checking accounts. 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, since nearly 80% of U.S. banks consult ChexSystems before granting new accounts. In addition to unpaid overdraft fees and abandoning accounts with negative balances, other infractions that could lead to a ChexSystems report include trying to deposit counterfeit bills or forged checks and other activities deemed “suspicious” by bank officials.

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While ChexSystems provides an important service to banks looking to avoid potentially sketchy customers, like other major credit reporting agencies, ChexSystems has its critics. For one, many feel that ChexSystems unfairly penalizes honest people who have made understandable errors with their checking or savings accounts. 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.

Others, such as consumer protection groups, are skeptical of ChexSystems because they feel that it sets low-income Americans up for financial failure. Many people who repeatedly bounce checks or rack up overdraft fees they’re unable to pay are those living in poverty; if poor Americans get locked out of the legitimate banking industry, they are left vulnerable to banking scams which will further exacerbate their financial problems.

So what are the best ways to avoid being reported to ChexSystems?

These tips should help you stay on the straight-and-narrow with your bank:

  • Avoid overdrawing your account by keeping good records of withdrawals and deposits
  • If you incur bank fees, pay them in a timely manner
  • If you incur bank fees that you’re unable to pay, communicate with your bank. Most big banks have repayment plans for customers in your situation.

I don’t know about you, but now that I know how difficult it is to bank with a bad ChexSystems report, I’m going to be reading my statements a lot more carefully!