What is ChexSystems?

Most consumers never hear of ChexSystems until the day it gets in their way. You try to open an account at a new bank or credit union, only to be told that you cannot do so. The reason? You are listed in ChexSystems.
What is ChexSystems?

So now you are probably wondering what ChexSystems is and what you can do about it. Will you ever be able to open a bank account? How did you end up in ChexSystems in the first place? Why do banks use ChexSystems? What is it for? Let’s break it down.

ChexSystems Defined

ChexSystems is a credit reporting agency and check verification service. It is run independently of any bank or credit union, and is owned by a subsidiary of eFunds called Fidelity National Information Services.

Banks rely on ChexSystems to provide them with information they can use to pre-screen banking customers. Those who appear in the ChexSystems list are typically rejected. Those who do not (and do not appear in TeleCheck or EWS or similar databases) are usually accepted.

How Many Banks Use ChexSystems?

Just how ubiquitous is ChexSystems? In the United States alone, 80% of banks and credit unions rely on the system to screen applicants. According to eFunds, more than 100,000 bank branches belonging to more than 9,000 banks throughout the US make use of ChexSystems.

So that means that you cannot just walk into any bank or credit union and expect to be able to open an account if you are in ChexSystems. In fact, odds are about eight out of ten that you will be rejected out of hand.

Later on in this article, we will point you toward some resources to help you get started with banking right now, even if your name is in ChexSystems. But first, let’s learn more about ChexSystems itself—how banks benefit from using it, how it works, and why you may be listed in it.

See more: Discover banks which do not use ChexSystems

Why Banks Use ChexSystems

The reason banks use ChexSystems is simple, and that is to save money. Banks which use ChexSystems do two things:

  • They use the system to screen applicants.
  • They provide information which is aggregated through the system which other banks can use.

In essence, if a bank which uses ChexSystems has had an unfortunate experience with you, that may get you listed in ChexSystems. That means that another bank which uses ChexSystems is going to be leery of giving you an account. Statistical data has shown that doing so makes it more likely that they will lose money than if you were not listed in ChexSystems.

Mishaps Which May Cause a Customer to Be Listed in ChexSystems

What kinds of monetary losses are banks worried about? To shed some light on this, let’s take a look at some of the common reasons why customers may find their names in ChexSystems:

  • Unpaid overdrafts
  • Fraudulent check deposits
  • Uncollected services charges or other fees
  • Losses through non-sufficient funds
  • Debit card abuse
  • Depositing uncollectible checks
  • “Undisclosed”

This is not an extensive list. There are numerous reasons why a customer might have a ChexSystems record. Indeed, “Undisclosed” is an umbrella term which essentially stands for “Other.” All kinds of miscellaneous violations could be filed under ‘Undisclosed.”

Take note that customers are only listed in ChexSystems if they have committed some kind of offense. Those who have not do not have ChexSystems records.

If You have a ChexSystems Record, ChexSystems Has Assigned You a Score

If you are listed in ChexSystems, you have what is known as a “ChexSystems score.” This is not the same thing as your credit score, though many consumers confuse the two. Your score with ChexSystems could range anywhere from 100-899. If you have a high score, you are considered a lower-risk customer. If you have a low score, that means ChexSystems perceives you as a particularly risky consumer. Learn more about ChexSystems scores.

Is ChexSystems Really Fair?

You might have noticed something about the list of examples we provided in the section on mishaps—unpaid overdrafts, non-sufficient funds losses, and so on. Fraud is obviously a major problem, and it can cost a bank serious money. But what about some of the other less major violations? Let’s take a couple of examples.

ChexSystems Fairness: Example #1

Here is a situation where ChexSystems is entirely fair. Imagine that a customer is guilty of check kiting. This is where a customer has two banks accounts, and uses one with insufficient funds to write a check to deposit into the other.

The second bank will provide a temporary credit while the check is pending. This credit can then be used to write another check, which is sent back to the original account. This clears the amount of the first check.

This is like borrowing money from the bank without paying any interest. It deprives the bank of the money they could have made through a proper loan.

Another good example would be check abandonment. This crime is simple and straightforward. A customer writes a bad check, then withdraws the credit. This is flat-out theft. A bank can lose quite a bit of money through this sort of crime.

Naturally banks and credit unions have every right and reason to want to prevent this kind of activity. If a consumer commits these types of fraud and is listed in ChexSystems, that legitimately can save the bank who rejects the customer money.

ChexSystems Fairness: Example #2

Here is a situation where ChexSystems is totally ridiculous. Imagine a customer who is down on his luck and living on the fixed income he gets from unemployment checks. He makes a simple mistake while buying a $2 cup of coffee that overdraws his account. Completely oblivious, he goes on about his day.

He finds out the next day that his account is now $22 overdrawn—the first charge being the $2 for the cup of coffee (still unpaid), and the $20 overdraft fee the bank has hit him with.

Unfortunately, he only has $10 in cash, so there is no possible way for him to cover the fee. He goes in to talk to the bank, but they will not budge. The coffee shop makes another attempt to get their $2, and he winds up with a second $20 overdraft fee. Now his account is overdrawn $42, and he has no possible way of paying for it.

Eventually, the bank gets fed up trying to collect the fees, and shuts down the customer’s account, reporting him to ChexSystems. Now he cannot open a bank account at any bank which uses ChexSystems.

Obviously this situation is absurd. The customer could have paid for the cup of coffee, and was not attempting to rob the bank of anything. He simply made a mistake. Moreover, the fees which the bank tried to charge him were exorbitant.

Worse, the bank is acting like this poor customer actually took $42 from them (or however much the additional fees they may have tacked on eventually added up to). This is not really a “loss” in any meaningful sense to the bank. The fees were unreasonable and unnecessary in the first place.

So is ChexSystems fair? In some situations, yes; in others, definitely not. In any case, you now should have a pretty solid grasp on what ChexSystems is, why banks use it, and how it sometimessaves them money.

Oftentimes, however, it just inconveniences totally legit banking customers. It is pretty crazy that a customer who makes a simple overdraft mistake should be banned from opening a bank account for the same length of time as a fraudster, but it happens all the time.

On the Brighter Side, ChexSystems Does Help Protect Consumers from Identity Theft

It is easy to get angry about ChexSystems and its inherent unfairness. But you may feel a bit better when you realize that this system does exist to protect you as well as the consumer.

Identity theft is a mounting problem these days. With the 2017 Equifax hack, the information of more than 143 million consumers in the US alone was compromised.

If you are one of the consumers who was affected by that breach—or any other—that is not something you need to worry about for just a few weeks or months. It remains a threat for years. Identity thieves often wait quite some time to act. Oftentimes the initial incident was forgotten by the consumer by the time their information is used by fraudsters.

ChexSystems actually helps to prevent identity theft crimes. When a customer tries to open an account, the system takes a look at the information they provide to make sure that there are no discrepancies. If any are found, that results in that customer being declined.

Furthermore, there is a chance that you could be listed in ChexSystems because your identity already was stolen and used successfully by a fraudster.

If that is the case, you may find out when you are declined for a bank account. This may be the first hint you have that your identity has been used for illegal activities, so that gives you a chance to do something about it. ChexSystems itself provides some useful information and tips on identity theft on the official ChexSystems website.

So despite its hassles, ChexSystems is an important institution, both for banks and for customers. So keep that in mind when dealing with it.

How ChexSystems Works

Here is what happens when you walk into a bank branch and attempt to open an account.

First, the bank employee inputs your information into their system. Usually you will be asked to give our first and last name, your street address, and your social security number. This launches a check to see if you are listed in ChexSystems.

Next, the system will come back and report on whether or not you have a record. If you do not and there are no issues with your personal information, you should be good to go.

If however you do have a record, the employee will take a closer look. There are a variety of different types of ChexSystems records, but most fall into one of the following categories:

  • Accounts closed by another bank or credit union
  • Accounts closed by the same bank or credit union where you are applying

The employee will also see a specific reason listed, for example non-sufficient funds issues or some form of check fraud. Some people believe that bank workers are given no details by ChexSystems, but this is a misconception.

You can ask the employee for details, but do not expect an answer. Bank employees are trained not to give out the details, but to ask you for them. That way they can check what you report against the record to try and determine what really may have happened. This may affect their decision.

ChexSystems then provides some additional information to the bank, including:

  • Any other recent ChexSystems inquiries from other institutions on the same consumer.
  • Personal information (i.e. name, address, and social security number) used for those recent inquiries.
  • Details on the consumer’s social security number state and issue date.

Naturally, if there are any discrepancies in personal information, that is going to raise a red flag.

It is also something of a red flag if there are other recent inquiries on file at other institutions. Why? You may just be desperate to open a bank account, but to the bank, it looks like you might be planning on check kiting or similar fraudulent schemes that require multiple accounts.

This is actually a good reason not to go running around trying to open account after account. Instead, you should apply at banks which are likely to accept you (more on that at the bottom of this article).

ChexSystems will then provide a recommendation based on all of this data. The system may recommend any of the following:

  • That your new account be approved.
  • That you be summarily denied.
  • That the bank or credit union ask you to provide additional information or clarification so that a decision can be reached.

Remember, if you are denied for a bank account, the employee will not tell you the specific reason. This does not mean that they did not look at the details of your report. It simply means they are forbidden from conveying that information to you let you use it to manipulate them.

What Can You Do If You Are Listed in ChexSystems?

So now you know what ChexSystems is and how it works. What can you do if you do find out you are listed in it?

At this point, you should contact ChexSystems directly and find out what your ChexSystems record says. If you wish, you can attempt to dispute ChexSystems as well, though it is a challenging process. Find out how to dispute ChexSystems.

In the meantime, you do not need to live without a bank account. There are banks out there which do not use ChexSystems. While there are no guarantees, there is a very good chance that one of these non-ChexSystems banks will allow you to open an account and start banking as usual, even with the black mark on your record. See the list of non-ChexSystems banks here.

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