What Is Chexsystems?

Everything you need to know about ChexSystems, formerly known as Chex Systems, Inc.

Chexsystems, formerly known as Chex Systems, Inc., is a consumer reporting agency that provides reports on an individual’s banking behavior to financial institution members. These reports help financial institutions to identify account applicants who have a history of account mishandling (for example, individuals who may have closed their accounts for negative balances or those who may have lied when they opened their accounts).

Headquartered in Delaware, Chexsystems serve members, including banks, credit unions and other financial institutions, all over the United States. It’s governed by the federal Fair Credit Reporting Act (FCRA) and other financial laws and regulations. The agency is also licensed to provide debt collection services to clients participating in their service. It is wholly owned by eFunds, the United States’ leading risk management and electronic payments company, and is currently the main provider of account verification services as well as risk management in the banking industry.

Understanding the Role of Chexsystems

The role of Chexsystems is to continually update a database of poorly managed check and savings accounts. This information typically shows individuals with a history of banking or credit problems and is shared between a number of different banks, credit unions and financial institutions who have subscribed to their service. The use of this is to determine if potential customers are too great of a risk to the subscribing financial institution. Most banks and credit unions use this database to assess the level of risk of customers opening new accounts, including second chance checking accounts.

How Chexsystems Works

Chexsystems functions much like any other credit bureau. But unlike credit bureaus, Chexsystems is responsible for monitoring the bank activities of the latter, rather than facilitating the credit standing of the consumers. Instead of collecting data about your credit history, it focuses on recording your banking activities, including how you have handled your checking and savings accounts. But you can request a report from them, just like with the credit bureaus.

Chexsystems serves as a way for financial institutions, particularly banks, to identify customers who have a history of illegal, fraudulent or irresponsible behavior with checking accounts. Some bank customers try to avoid paying the overdraft fees and interest they incur from overdrawing their checking accounts by closing those accounts and moving on to another provider. Failure to settle the account means the account balance remains negative and the customer still owes the bank money.

Chexsystems Report

Normally, when a person fails to pay a bill, let’s say a mortgage payment, their name and the outstanding amount they owe is reported to one of the credit bureaus such as Experian, Equifax, or TransUnion. This system works well for customers’ credit accounts, such as mortgage loans and auto loans, but does not translate well when it comes to non-credit accounts like savings or checking accounts held with a typical bank. This is where Chexsystems’ services come in.

A Chexsystems will provide information on your activities relating to checking and savings accounts. ChexSystems report includes details such as unpaid overdrafts, bounced checks and compulsory closure of one’s accounts as a result of default payments. Misuse of ATM card or debit card, having non-sufficient funds, failure to pay bank fees and engaging in illegal activities, such as bank fraud, giving false information in order to get a new bank account opened and opening multiple accounts for the purpose of account theft, check kiting or money laundering will also be reflected on your Chexsystems report.

So if you overdraw your bank account and the overdraft remains unpaid, or if your bank account is closed due to defaulting or suspected illegal activities, Chexsystems will report this information to members. This will, in turn, affect your ability to open future bank accounts, since only 20% of banks do not use Chexsystems to find information on customers. Their records of bank transactions of consumers remain in their database for five long years. During these years, you might be disqualified in applying for new checking accounts and loan applications – which can be very inconveniencing. Because of this, you must try your best to keep your checking account in good standing and avoid being reported to Chexsystems.

Negative Records

To avoid getting a bad Chexsystems report, you should avoid overdrawing your account. A good way to ensure you don’t overdraw your account is keeping good records of all your withdrawals and deposits. Also, try to avoid incurring bank fees or charges. But if you do, talk to your bank to arrange for an appropriate repayment plan and make sure you make payments in a timely manner.

Nonetheless, it’s worth noting that some banks may disregard this information provided in your Chexsystems report if the amount involved was small or if the infraction occurred several years ago, thus allowing you to open a new account. Each financial institution sets its own laws regarding how to treat Chexsystems reports and some don’t even use the system. Many banks also provide second chance checking accounts to individuals with a record of banking or credit problems. These accounts often come with a required monthly fee and may initially require you to only use a debit card or teller transactions to make withdrawals, instead of using paper checks. These restrictions are meant to prevent abuse of the system.

Debt Collection Services

As well as working as a consumer-reporting agency, Chexsystems also provides debt collection services to members. They may attempt to collect money owed to a member financial institution from customers who have left that institution or had their account closed with large overdrafts outstanding. But some members don’t use this service and use other collecting agencies for this purpose or attempt to do it on their own. One major criticism of Chexsystems is that many account holders do clear up their overdraft amounts and fees but still show up as having an unpaid overdraft in their report. The system almost entirely focuses on the negative and doesn’t provide positive information such as overdrafts that have been paid off or lines of credit in good standing. So you may still show up with an overdraft in their reports, regardless of the fact that you have cleared up any outstanding amounts and resolved any problems you might have had with your bank.

If your application for a bank account has been turned down due to a bad report, you should verify whether you still show an unpaid balance. Just request your free Chexsystems report and read it through to see if you owed money to a bank or to the institution’s collection agency. You must clear any money owed in order to have the report removed and get your account cleared. If you believe you have paid the amount in dispute, you can provide them with proof to have the problem resolved. Though there’s no guarantee this will work and you may still show that you had an account in default, you can prove to the bank that the problem has been resolved.

Conclusion

If you don’t have proof of an error, but you still need to get out of Chexsystems, our free guide to Chexsystems Removal has helped thousands of people!

Rooting for ya,
Kelly Scott