Finding a second-chance checking account

Having to work outside the banking system can be expensive and inconvenient. Unfortunately, this can easily happen to people whose accounts are closed by their banks because of chronic misuse of the account.

If this has happened to you, the good news is that there is a way to get back into the banking system. It's called second-chance checking.

Why do customers lose their checking accounts?

For starters, how does this happen? Why do people get booted out of their banks?

One way or another, the answer often boils down to sloppy banking habits. If you repeatedly bounce checks, for example, it creates administrative problems and expense for the bank that may not be worth their time. If you let your balance get too low, it may not be sufficient to pay fees that are due on the account, so the bank might terminate your account for non-payment of those fees. Frequent overdrafts, because of the high fees they incur, can easily result in running up fees that exceed your balance.

The occasional mistake is not likely to get your account terminated, as long as you rectify it. If you continually make these mistakes or fail to pay an outstanding fee, though, your bank is likely to conclude that it is not worth doing business with you.

If I go to another bank, will I be able to start fresh?

So what if you get kicked out of one bank? There are plenty of others out there. Can't you simply take your business elsewhere and start over?

Actually, it's not that simple. A company called ChexSystems maintains records on bank customers and provides reports on them that are widely used in the industry. Think of this as a form of credit report that is only focused on your banking history. It will show whether a bank has ever had to close one of your accounts and whether there are any unpaid items outstanding.

ChexSystems maintains records on bank accounts for five years after they are closed; so if a bank has shut down one of your accounts in that period, it is likely that this history will show up when you try to start a new account at another bank. In that case, your best shot might be to find an account specially designed for people with banking problems in their past -- a second-chance banking account.

What is a second-chance checking account?

As the name implies, second-chance checking accounts are designed to help people demonstrate that they are now ready and willing to handle a checking account more responsibly, even though they've made banking mistakes in the past.

The specific terms of second-chance checking accounts vary greatly from one bank to another; but, in general, they have characteristics that tend to ease the customer's transition back into the banking system while also providing certain protections to the bank.

This means that they may have relatively low initial-deposit requirements and, in some cases, relatively low monthly fees and/or make fee waivers available under some circumstances. Those are helpful features for people of limited means trying to get back into the banking system. In return, with these accounts, banks might limit access to certain services or charge higher fees for some activities.

Since the specific characteristics of second-chance checking accounts vary greatly, it is important to do some comparison shopping to find the best terms available to you.

Where to find second-chance checking accounts

How do you find second-chance bank accounts to compare? Some banks label these accounts clearly as "second-chance accounts," while others use titles such as "opportunity accounts" or "basic accounts." Another common term for these accounts are "bad credit bank accounts." Look for names like that, or ask banks you are interested in about this type of account.

Don't neglect to look at online banks to find an online checking account for bad credit. Online banking has greatly increased access to banking no matter where you live and, in general, online accounts have lower fees and minimums than branch-based banks.

You might also try looking for an account on www.nonchexsystems.org. This is a crowd-sourced website specializing in identifying banks that either do not use ChexSystems to screen customers or offer accounts for people who may have had trouble with bank accounts in the past.

While crowd-sourced information is not necessarily authoritative, this website does give you plenty of options. It not only identifies possible second-chance banks by state and city, but it even shows the success rate users have had in trying to open accounts at those banks.

MoneyRates tips for second-chance banking:

Based on the above, here are some tips for finding a second-chance bank account:

  1. Get a free report from ChexSystems:

    If you get turned down for an account, or otherwise suspect you might have a bad record as a bank customer, you are entitled to receive a free report from ChexSystems. This will let you see if there are any issues that can be resolved, or at least when any problems will come off the report after the five-year retention period.
  2. Settle any old banking debts:

    While paying any back-fees you owe will not take an account problem off your ChexSystems record, that record will be updated to reflect that the matter was settled.
  3. Look for accounts with fee waivers or with no monthly fees:

    Average monthly checking account fees add up to more than $150 a year, which can really hurt if you are trying to re-establish an account with a low balance. While they are in the minority, some accounts still charge no monthly fees. Many others will waive that fee if certain conditions are met, such as, maintaining a specified minimum balance or setting up regular direct deposits.
  4. Take care to avoid overdrafts:

    Overdraft fees average over $30 per occurrence, and may be even higher on second-chance accounts. Regular monitoring of your balance is the type of banking habit you need to develop to use a checking account responsibly.
  5. Ask about the opportunity to upgrade accounts:

    If a bank accepts you for a second-chance account, see if you will be eligible to be upgraded to a regular account with better terms if you handle your second-chance account responsibly for a given probationary period.

Remember, finding a second-chance checking account is just the start. After that, it is up to you to use the account responsibly to make the most of your second chance.

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