When you’re considering opening a checking account, you might be concerned about whether your credit score is high enough. If you’ve had a few financial mishaps, you might be worried that you won’t qualify for a checking account. So, do banks actually do a credit check when you open an account?
Typically, banks don’t do credit checks when you open a checking account, but they do check other things that could affect your eligibility. Some banks even check your credit score. In this comprehensive guide, we’ll explore what banks consider when you open a checking account, ChexSystems, and how your credit score might impact your ability to open a bank account.
What do banks consider when you open a checking account?
Every bank is different, and most banks and credit unions do not perform a credit inquiry when you apply for a new account. Although you aren’t borrowing money when you open a checking account, you still use the bank’s services.
Banks are for-profit institutions and only want to deal with clients who will make them a profit. This means that they want clients who will use their bank accounts responsibly, not overdraft or abuse their accounts.
Banks may check your:
- ChexSystems report
- Credit score or credit report
- Early Warning Services report
If banks do check your credit report, they’re looking for financial responsibility. They don’t want to see late payments, overextended credit lines, or collection accounts.
You’re probably familiar with the credit bureaus: TransUnion, Experian, and Equifax. They report information about your credit history, not your bank history. ChexSystems is the banking version of the credit report. Instead of providing details of your previous borrowing history, ChexSystems provides records of closed checking and savings account histories.
ChexSystems is a consumer reporting agency that reports any negative actions you’ve taken with a bank account, such as unpaid negative balances (from overdrafting), frequent overdraft fees, bounced checks, and suspected fraud.
If you’ve always handled your deposit accounts appropriately, you won’t have a ChexSystems report, and that’s a good thing.
Reasons for a ChexSystems report include:
- Bounced checks
- Account abuse
- Fraudulent activity
- Non-active accounts (forced account closure)
It’s worse to be in ChexSystems than having a low credit score when attempting to open a bank account.
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Do banks pull your credit report before opening an account?
Most banks and credit unions only pull your ChexSystems or Early Warning Services report. It’s rare for a bank to pull your credit reports from the three major credit bureaus to open a checking account.
Before you apply for a checking account, you can ask the bank or check their website. Most financial institutions are transparent about their requirements for opening a bank account. If you find a bank that checks your credit and you don’t think you’ll qualify, there are many other banks to choose from.
See also: Banks That Don’t Use ChexSystems
Opening a Bank Account with a Poor Credit Score
If a bank or credit union checks credit, your chances of opening a bank account with a poor credit score are slim. If you have a poor credit score, chances are you have marks on the ChexSystems platform too.
Every ‘issue’ has a different point value in ChexSystems. The higher your ChexSystems score, the less risk you pose to a bank. If you have a low ChexSystems score, you may also have a low credit score. This is especially true if you’ve had any unpaid fees or overdrafts sent to a collection agency, affecting both your consumer credit score and ChexSystems score.
Second chance checking accounts
Many banks and credit unions offer second chance checking accounts to people with a poor banking history. These bank accounts are designed to help individuals rebuild their banking history and prove their financial responsibility.
Can banks check your credit score?
Banks can check your credit score, but only with your approval. You must sign a disclosure that allows them to pull your credit. When they pull your credit, it could be a ‘hard credit inquiry,’ which means it affects your credit score. However, it could also be a soft credit inquiry, which doesn’t affect your credit score.
Hard inquiries vs. soft inquiries
- Hard inquiries might take off five to ten points from your credit score and are visible to other lenders.
- Soft inquiries don’t impact your credit score and are only visible to you.
If your credit score is already borderline, a hard inquiry could put you over the edge, making you ineligible for a new bank account or loan.
Can you hide your credit score?
If a bank or credit union asks to pull your credit and you authorize it, you can’t hide your credit score. However, if you put a freeze on your credit, no one can pull your credit, including you. This will ‘hide’ your credit score from financial institutions.
If a financial institution cares that much about your credit score, they may ask you to unfreeze it, but most won’t. In fact, most banks won’t ask about your credit score unless they have a reason to worry about your financial worthiness.
How to Improve Your ChexSystems Score
If you find yourself in ChexSystems, there are steps you can take to improve your score and increase your chances of opening a checking account.
Steps to improve your ChexSystems score:
- Pay off outstanding debts: Clear any unpaid negative balances or overdraft fees with your previous banks. If you can’t pay the full amount, try negotiating a payment plan or a settlement for a lower amount.
- Dispute inaccuracies: Review your ChexSystems report carefully and dispute any errors or inaccuracies. A corrected bank history report can lead to an improved score.
- Wait it out: Most negative information remains on your ChexSystems report for five years. Over time, older negative items will have less impact on your score.
- Open a second chance checking account: Use this account responsibly to demonstrate good banking habits, which can improve your ChexSystems score over time.
Strategies to Improve Your Credit Scores
Improving your credit scores can have positive effects on your financial life beyond just opening a checking account. Here are some strategies to help you boost your credit scores:
- Create a budget and stick to it: Develop a budget that takes into account your income and expenses, and make sure you adhere to it. This will help you avoid overspending and stay on top of your financial obligations.
- Pay bills on time: Payment history is the most significant factor affecting your credit score. Make sure you pay all your bills on time to avoid late payments that can hurt your score.
- Reduce your credit utilization ratio: Credit utilization refers to the percentage of your available credit that you’re using. Aim to keep your credit utilization ratio below 30% to improve your score.
- Don’t close old credit accounts: The length of your credit history plays a role in your credit score. Keep older accounts open, even if you’re not using them, to maintain a longer credit history.
- Diversify your credit mix: Having a mix of different types of credit, such as credit cards, mortgages, and installment loans, can improve your credit score.
- Limit new credit applications: Applying for too much credit in a short period can lower your credit score. Only apply for new credit when necessary.
Your credit score most likely won’t affect your approval odds for a new checking account. However, it does provide an overall picture of your financial health.
In addition to pulling your ChexSystems report, make sure you check your credit report provided by the three credit bureaus. You should stay on top of your credit history regardless of whether it’s used to open a checking account.