ChexSystems: Banks' secret watchdog is watching you

This post comes from partner blog The Dough Roller.

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 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, TransUnion and Equifax. But there is a lesser-known but equally important reporting agency for checking accounts called ChexSystems.

• Bing: Find more on 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).

We'll 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. Much like a creditor can report late payments or charge-offs to a credit reporting agency, a financial institution may report nonsufficient fund checks or overdrafts to ChexSystems.

Information reported by banks to ChexSystems typically stays in the system for five years. Items are removed before the expiration of the five-year period only if the reporting financial institution requests it or applicable law requires that it be removed. Items remain in the system for five years even if the banking customer subsequently covers the overdraft. The institution, however, should notify ChexSystems that the item has been paid.

What's reported?

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

ChexSystems also notes inquiries initiated by a consumer (e.g., applying for a bank account) and those initiated by others, such as creditors and potential employers. Finally, ChexSystems can include information reported by retailers through the Shared Check Authorization Network. SCAN is a comprehensive database of bad-check writers in the U.S. Participating retailers can obtain a customer's history of bad checks, if any, and then decide whether to accept a check. That information is also reported to ChexSystems.

How to avoid 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 recommended solutions:

• You forget 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 the 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.
• You close 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.
• 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 you deposit a check, allow enough time to make certain it clears -- usually three to five days -- before writing checks against the balance.
• You write 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-sign on an account that is 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 give your personal identification number to someone else and that person takes funds from your account without your authorization. Never give your PIN to someone else. It's like opening the door to your finances. Inform your financial institution of the situation. It may suggest that you change your PIN or that you close the account and open a new one.
• You post-date a check and it's cashed too early. Post-dating checks is hazardous because the other party is not legally obligated to hold the check. If the check is accidentally cashed early, you are responsible.
• 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 about changes to your personal information. Not knowing the status of your account does not excuse you from being responsible for it.
• The financial institution makes a mistake. Errors, such as posting to the wrong account number or unauthorized withdrawals, have been known to happen. 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 it, 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 written checks against your account. 

Finally, if you think you may be in the ChexSystems database, 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. You can obtain it for free by clicking here.

Related reading at The Dough Roller:

• Online banking: A complete guide to Internet banks
• Best high-yield savings account offers
• Beware of bank overdraft protection fees