Readers often ask what happens if you bounce a check. Will it affect your credit score? The answer is no, but you should still avoid writing rubber checks. ChexSystems tracks and reports people who have had trouble in the past, and some banks will deny you an account if ChexSystems has bad information on you.
If you're bouncing checks, consider balancing your checkbook regularly and see if alternative payment methods would help any.
Why Banks Use ChexSystems
Banks and other organizations don’t like it when you write bad checks. In order to discourage you, they typically have hefty fees and policies to keep this behavior to a minimum. Sometimes these are referred to as “overdraft protection plans”.
Since deposit accounts – like checking accounts and savings accounts – don’t show up on your credit report, banks have to find another way to determine how risky you are as a customer. They use a system called ChexSystems. ChexSystems is similar to the major credit-reporting agencies. In fact, ChexSystems is regulated under the Fair Credit Reporting Act (just like your credit reporting companies).
What ChexSystems Does
ChexSystems simply keeps a list of reports about people who have (one way or another) spent more money than they had in their bank accounts or violated bank policies. To put it simply, they have a list of people who bounce checks or owe a bank money.
If you bounce checks, your bank may report you and your activity to ChexSystems. ChexSystems then shares that information with other institutions that ask about you. It’s kind of like an agreement among the banks to help each other avoid risky customers.
Any negative reports are kept on file for 5 years. After that time, ChexSystems removes the report. In addition, a reporting bank can ask ChexSystems to remove a negative report.
ChexSystems also offers some additional identity verification services to banks, but the meat-and-potatoes is the risk reporting.
What ChexSystems Does Not Do
ChexSystems does not decide whether or not you should be allowed to have a bank account. They simply tell an inquiring bank what they know, and the bank makes the decisions.
In addition, ChexSystems doesn’t have a complete history on everybody. First, ChexSystems only keeps records of negative items. Contrast this to a credit bureau that also keeps records of well maintained debts. Another way to look at this: if you’ve got a credit history it generally helps; if you’ve got a ChexSystems history it hurts you.
ChexSystems is only as good as the information it receives. If a bank fails to report a mismanaged account, ChexSystems will never know. Likewise, ChexSystems may have erroneous information that the consumer needs to correct.