Note: This article is part of our Basic Banking series, designed to provide new savers with the key skills to save smarter.
Many banks and credit unions will check your credit history to determine your track record as a banking customer and get a sense of your financial responsibility. In assembling the bank credit report, a bank or credit union may check with several sources, including the three credit reporting agencies, as well as ChexSystems, which compiles a history of consumer banking records.
ChexSystems is a record of your most recent banking history, such as overdrafts, closed accounts and other activity. The more negative activity displayed on your report, the less likely you are to get approved to open a new deposit account at a bank. By law, negative activity must fall off your ChexSystems report after seven years. Often, ChexSystems will drop those items (save for bankruptcy) from a report after five years.
In this post, we’ll review what factors into a bank credit report, how you can monitor your own credit report for accuracies and mistakes (and what to do if you find something fishy) and how you can improve your credit score.
What banks look for when they check your credit report
Banks use credit report information to make decisions on everything from opening an account to extending a loan. “You want to see if there is any risk with a new account,” explained Lisa Hagins, regional sales leader for OneAZ Credit Union’s southern region in Tucson, Ariz.
When a customer applies for a new account, many banks will run a custom credit check, which is often a combination of information from several sources, including the three credit reporting agencies and ChexSystems. They’re assessing your financial responsibility and get a window into past behaviors. A credit report will show if you’ve had a lot of outstanding debt, as well as if you’ve had a bankruptcy or foreclosure. Your ChexSystems report will detail your banking history, including writing bad checks, frozen accounts or unpaid overdrafts.
“Banks are looking for red flags,” said Kyle Kroeger, a former investment banker who now runs a personal finance blog Millionaire Mob. “They want to see if you have a track record of overdrafts, did you misuse bank accounts recently or did you open one and commit fraud. Those could all be grounds for a denial.”
When a bank pulls your credit report, it will likely be considered a soft inquiry, which does not have a negative impact on your credit score. A soft pull is typically a check of your score for preapproval for an apartment, loan or service. In contrast, with a hard inquiry, a check on your report is part of a final decision-making process to extend credit, such as applying for a loan or credit card. Hard inquiries can impact your credit score while soft inquiries do not.
What to look for on your ChexSystems bank history report
Before you apply to open a bank account, it’s a good idea to review your ChexSystems report, which details your history with banks and credit unions. Under federal law, you’re entitled to a free copy of your ChexSystems report every 12 months.
Here are some things to look at on your ChexSystems report:
- Verify that your personal information is correct (name, address, phone number and Social Security number).
- Review all accounts and confirm that the information is correct, including account closures and inquiries.
- In the “Reported Information” section, review any information about mishandled or abused accounts or outstanding debts. If any information is incorrect, file a dispute with ChexSystems.
- Confirm the “Inquiries” section, which shows institutions that have accessed your information, for accuracy.
- Review the “Retail” section, which includes information on returned checks.
What to look for on your credit report
A credit report is a detailed history of your financial behavior and commitments, including loans and credit cards, and how you have managed your debt. At least once a year, obtain a copy of your credit report and confirm that the information listed is accurate and up to date. You can check your own credit report at any time without any damage to your score.
Consumers are entitled to receive a free copy of their credit report annually from each of the three credit agencies, Experian, TransUnion and Equifax.
Review the reports carefully for errors and, if you spot inaccuracies, you can dispute them with the agencies. For added peace of mind, you can also subscribe to services that will send you regular reports and notifications of any changes.
Here are some important things to look for on your credit report:
- Verify that your personal information is correct (name, address, phone number).
- Confirm that all accounts listed are correct, including credit cards, mortgages and loans, and that your account status is correct.
- Check all public judgments, including court judgments, bankruptcies and tax liens.
- Examine credit inquiries to see who has requested to view your credit report and when.
- Verify trade lines, which are the statuses and activities on all your accounts. This section also includes when accounts were established, credit limits, types of accounts, balances and your payment histories.
If you see fraudulent activity on your credit report, you should notify the credit agencies and dispute the information within 30 days of receiving your report.
Tips to maintain a good bank history
Since some banks will review your previous banking activity as part of their approval process, it is important to keep your deposit account activity as up to date and credible as possible. While each bank and credit union uses a different set of standards to review your banking credit health, they’re all trying to assess your history with previous banks.
To improve your position, you can follow these tips:
- Make sure you have enough money on deposit to cover withdrawals and checks to prevent your account from going into overdraft.
- If you do go into overdraft, repay the amount and any penalties promptly.
- Avoid negative balances and, if you have them, replenish your account as soon as possible.
- Since many banks review your ChexSystems report as part of their credit check, obtain a copy of your report at least once a year and check it for accuracy.
- Set up text or email alerts for when your account balance gets low or goes into overdraft.
Maintaining good credit
When it comes to your consumer credit, the Fair Isaac Corporation, or FICO, which calculates credit scores and is used by about 90% of lenders, bases its formula on five components:
- Payment history: 35%
- Amounts owed: 30%
- Length of credit history: 15%
- How many types of credit in use: 10%
- Account inquiries: 10%
Many consumers get tripped up because they aren’t aware of these five factors and their impact, noted R.J. Weiss, a CFP who runs the financial information site The Ways to Wealth.
“Ninety percent of the battle is actually knowing what goes into your score,” he said.
To maintain a good score or improve your score, credit experts advise consumers to consider these steps:
- Pay your bills on time and, if you can, in full, but even making the minimum helps.
- Keep your balances low. Ideally, you’ll only be using 30% of your available credit at any time.
- Consider enrolling in automatic payments or set up text, email or push-notification reminders.
- Maintain existing accounts, as a credit history is an indication to creditors that you have made payments regularly and your accounts are in good standing.
- Diversifying your credit mix, including a mortgage, auto loan, personal loans and credit cards, can strengthen your score. Just be sure you’re not overextended and can make all of your payments, Weiss cautioned.
- Don’t apply for too many accounts at once. When you have too many inquiries into your credit report, it can actually lower your score. Instead, try to do research and pick the right loan product before you apply.
Bottom line on a bank credit report
With regular monitoring and good financial habits, you should feel well-informed and confident with your banking history and credit report before you go to apply for any new accounts. If you understand your financial position, you’ll be prepared for any questions or concerns your bank might have when they prepare a bank credit report. If you’re concerned about your deposit account activity and credit score — possibly limiting your banking options, you can take action to improve your reports and, ultimately, unlock more financial freedom.