ChexSystems Reporting

What Happens if You Write Bad Checks?

Banks Communicating
••• Stuart Kinlough / Getty Images

Running out of money in your checking account can create several problems, including getting yourself on a list of people who write bad checks. Several databases track your checking behavior, and eventually you might have trouble opening a bank account and paying by check.

Most people are familiar with the obvious consequences of bouncing checks:

  • Fees: your bank – and whoever you wrote the check to – will most likely charge fees around $35 or so when a check is returned. If you were paying something with a due date, you’ll also face “late payment” fees (and other complications can arise as well).
  • Credit scores: a bounced check does not immediately damage your credit, but you need to get things cleared up and make your payment. If you take too long, your creditor (whether it’s a doctor’s office, merchant, or municipal district) might send your account to a collections agency – and then your credit will suffer.
  • Account closure: after too many bounced checks, your bank might close your account to minimize risk

Bad Check Lists

Many people are not aware that there are several consumer reporting companies that track your checking account activity. If you go below zero in your checking account more than just occasionally, these companies can create problems for you. Many of these companies are regulated under the Fair Credit Reporting Act (FCRA), just like the major credit reporting agencies.

The two main types of transactions that cause trouble are:

  • Bouncing a check – when you write a check, but it is returned unpaid when somebody tries to deposit or cash the check
  • Insufficient funds – when charges to your account (including checks you write, as well as electronic funds transfers) would bring your account balance below zero

ChexSystems is one of the companies that tracks your banking behavior. ChexSystems is primarily used by banks and credit unions when evaluating whether or not to open a checking account for you.

It is risky to have customers routinely bounce checks, so many banks run a search on potential customers before opening accounts. Other companies, like TeleCheck, Certegy, and Early Warning Systems provide similar reports.

What ChexSystems Does

ChexSystems keeps records on people who have (one way or another) spend more money than was available in their checking accounts, as well as those who have violated other bank policies. If you've bounced checks in the past or you owe money to a bank, there's a good chance that you're in the ChexSystems database.

Banks and credit unions provide information about your banking behavior to ChexSystems, and other sources contribute as well. Then, financial institutions buy reports from ChexSystems to find out if you’ve had problems at other banks.

The main ChexSystems report only contains negative information. In other words, you’ve only got a record in that report if you have bounced checks or had overdrafts in your bank accounts. If there’s nothing in your ChexSystems report, that’s a good thing – and it’s different from credit reports for borrowing, which are better if you can show a solid history of borrowing and repaying.

Negative records are kept with ChexSystems for five years, or until the bank or credit union that reported the problem asks to have it removed.

However, any erroneous entries can be disputed (they will be removed if you can provide sufficient proof of a mistake or identity theft).

ChexSystems does not decide whether or not you’re allowed to open a bank account. Banks make that decision based on their policies – but you’ll have better luck if your ChexSystems report is clean.

Getting Scores and Reports

As with all consumer reporting agencies, ChexSystems is required to provide you with a free copy of your report each year free of charge. For details on ordering a report, visit the . ChexSystems also creates a Consumer Score, which is a number used to try and predict your future behavior. You can also order your score, which is offered for free as of this writing (but consumer reporting companies are allowed to charge fees for scores).

Second Chances

If your ChexSystems report is making it hard to open an account, you’ll need to find a bank or credit union that is willing to work with you. You’ve got several options.

No checking: not all banks use ChexSystems reports. Find one, and they won’t turn you away based on the contents of those reports. Small local banks and credit unions are your best bet.

Make an exception: sometimes it’s possible to plead your case – explain what happened with your checking accounts in the past and why you don’t expect the same things to happen in the future. Again, your chances are best with a small institution.

Second chances: some banks, by policy, are happy to open accounts for people on bad check lists. Known as “second chance accounts,” these accounts give you less freedom to spend, but at least you can sign up for direct deposit, store funds, and earn interest. Over time you can work your way back to a fully-functional bank account.

Stop Bouncing Checks

To avoid problems in the future, keep a safety cushion of cash in your checking account. Start balancing your checkbook regularly, and see if alternative payment methods work any better (like a debit card, which will be rejected immediately if you have insufficient funds in your account).