You go to a financial institution to open a checking or savings account and a representative says you aren’t eligible. Why? Because a report shows that an institution previously closed your checking account, perhaps because of unpaid overdrafts.
Can the institution deny you a new account for that reason? What are your options for getting a new account? And, what if the negative information being reported about you is wrong?
By law, certain “consumer reporting” companies can collect information from banks and credit unions on aspects relating to a consumer’s checking account, such as the reasons an account was closed. These companies are similar to credit bureaus that track how consumers pay their bills and other debts.
Under the Fair Credit Reporting Act (FCRA), a checking account closed by an institution because of mismanagement, and most other negative information, can continue to appear in these reports for up to seven years. When a consumer wants to open a new deposit account, the institution may access such a report.
And just as a negative credit report can hurt your ability to borrow from a financial institution, a checking account history that shows a closed account can hurt your ability to open a new account. (An institution you are seeking to do business with also may access your credit score, which is based on your credit history, in deciding whether to open a new checking or savings account.)
“While consumers have generally become more aware of the importance of credit scores and credit reports, relatively few have thought about the services that report on their bank account activity,” noted Keith Ernst, an Associate Director of the FDIC’s Division of Depositor and Consumer Protection in charge of consumer research. “So, when people are denied the opportunity to open a new deposit account, often they are surprised to learn that negative information about a past checking account can be shared.”
Here are suggestions if you are unable to open a new account.
Ask the institution to reconsider its denial of a new account. “Every bank decides for itself how to evaluate the information in a consumer’s report,” added Ernst. “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.”
Review your report and dispute incorrect information. If the bank used a report from a reporting service in deciding not to open a deposit account, it must tell you the name and contact information for the company. “If some information is wrong, getting it corrected may enable you to open a new account when you otherwise couldn’t,” explained Tracie Greenway Morris, an Acting Community Affairs Specialist at the FDIC.
Under the FCRA, you are entitled to one free copy of your report every 12 months and any time that a report is used against you, such as an “adverse action” when your application is denied. You have a right to dispute any information in the report that is incomplete or inaccurate. Negative information in a report may include checks written without sufficient funds in the bank account, accounts closed with negative balances (fees owed to a bank), and transactions considered potentially fraudulent. Merchants may also report to these services any “bad” checks that you write to them — those that are returned unpaid by your bank.
The reporting services also must provide guidance on how to dispute the information. Generally, you should inform the reporting agencies, in writing, about information that is inaccurate, and provide copies of any available supporting documentation. “While supplying evidence can be helpful, it is not required. You can still dispute negative information in your report without it,” advised Ernst.
Be aware that when you contact a consumer reporting agency for a free copy of your report, the company may try to sell you other products, such as a numeric “score” based on the information in your report. Remember that you are not required to purchase any product for a free copy of your report.
For help with a question or complaint regarding a consumer reporting agency (checking or credit), start with the Consumer Financial Protection Bureau at www.consumerfinance.gov or 1-855-411-2372.
Look into “second chance” accounts. A closed account in your history doesn’t mean that you won’t be able to get another checking or savings account. “An FDIC survey indicates that one in five banks offers accounts that give an option to some consumers unable to open a regular checking account,” said Luke W. Reynolds, Chief of the FDIC’s Outreach and Program Development Section.
Second chance accounts generally have higher fees and more restrictions than traditional accounts but are still less expensive and more convenient than the alternatives of paying check-cashing and money-order fees.
Possible restrictions include: a lower dollar limit on daily withdrawals; deposits of only “official” checks, such as cashier’s checks or money orders; requirements to open and manage a savings account for several months before you can have a checking account; and only allowing debit card transactions, which can limit withdrawals to the balance in your account (i.e., overdrafts are not allowed).
Some institutions also may require you to attend free financial-management training. Even if they do not, you could consider using the online version of the FDIC’s “Money Smart” financial education curriculum to learn about selecting and managing a checking account effectively. Start at www.fdic.gov/consumers/consumer/moneysmart/mscbi/mscbi.html.
Institutions also may be less likely to allow you to open a checking account within a year after your account was closed due to overdrafts, suspected fraud or certain other issues. But if you owed a balance at your previous institution and have paid it in full, the new institution could be more willing to open a new account for you sooner.
Avoid scams. Be on guard against fraud artists and unscrupulous companies that offer to “repair” or “erase” your checking account (or credit) history, particularly if they charge a fee and “guarantee” a specific result. “If the history of a closed account is accurate, the reporting services are under no obligation to remove that information,” cautioned Reynolds. “The account closing will remain in their files for up to seven years unless the bank or credit union that supplied that information asks that it be removed or there is a reason to do so under the law.”
In general, think twice before paying for something that you can do at little or no cost on your own or with the help of a reputable counselor.
Once you obtain a new account, arrange to have money automatically transferred from savings to checking to cover overdrafts. And, develop a strategy based on what works best for you, perhaps one using smartphone technology, to know your account balance before you use your debit card or write a check.
“These days information is being collected, legally, on many aspects of our lives, and bank transactions are no exception,” Morris said. “Missteps or misinformation can jeopardize your ability to retain or acquire a bank account. So, bank carefully and know your options if a problem should arise.”