One good way to begin rebuilding credit that has taken a hit (perhaps from bankruptcy, foreclosure, or out-of-control debt that you are finally paying down) is to open deposit accounts with banks or other financial institutions. Read on to learn why this can help your credit, and how to get an account if your credit history is less than stellar.
(For more on why rebuilding credit without getting new credit is a good idea, and for other ways to do this, visit our Rebuilding & Improving Credit topic.)
Why Creditors Like to See Bank and Other Deposit Accounts
Nine out of ten American adults have checking accounts. Those who do tend to weather financial problems better and save more. Creditors look for bank accounts as a sign of stability. Quite frankly, they also look for bank accounts to make sure you’ll be able to pay your bills.
A savings or money market account, too, will improve your standing with creditors. Even if you never deposit additional money into the account, creditors assume that people who have savings or money market accounts use them. Having an account reassures creditors of two things: You are making an effort to build up savings, and, if you don’t pay your bill and the creditor must sue you to collect, it has a source from which to collect its judgment. And having an account will also help you put aside money for expenses that come irregularly during the year.
Where to Look for Checking, Savings, and Money Market Accounts
Just because you’ve had poor credit history, you shouldn’t be denied a bank account.
You must shop around to find the best account for you. A 2012 Pew Research survey of the 12 largest banks and 12 largest credit unions found that banks and credit unions charged anywhere from four to 48 separate fees on checking accounts. The kinds and amounts of fees varied dramatically. If you are not careful, you could end up with an account that actually makes repairing your credit harder because of excessive and hidden fees.
Credit unions and local community banks often have lower checking or saving account fees and require less money to open an account than do large national banks. The survey showed large banks charged monthly fees on about ninety percent of their checking account plans, but credit unions charged monthly fees on fewer than half of their checking account plans. The average monthly fee for large banks was $12; for credit unions it was $6. And, on average, you could avoid the monthly fee at credit unions if you had a balance of about $625, compared to a required balance of $2,000 to avoid the monthly fee at the banks. Credit unions are often a good place to start getting credit when you are ready for that.
Many banks scatter the important information you need to compare fees among, on average, nearly 70 pages of information, according to the survey. Credit unions use less than half as many pages, on average; but this is still a lot to search through. And often not all fees are disclosed on the bank’s website, so you have to go to a branch to get all the necessary information.
To comparison shop successfully, make a checklist of the important fees and costs so you can compare the information you get from different banks and credit unions. Compare at least these features:
- the amount you need to open an account
- the monthly fee
- whether the bank supplies checks for free, and if not, the cost of checks
- how you can avoid the monthly fee (usually by direct depositing your regular income check or keeping a high balance)
- the fee for writing a check without sufficient funds (NSF fee)
- overdraft fees (these are charged if the bank cashes your check and you don’t have enough in your account to cover it), including fees for transferring the money from another account or credit card or additional fees tacked on for additional days while your account is overdrawn
- the maximum number of overdrafts the bank will process in a day
- the order in which the bank will post checks
- the interest rate, if any, paid on the account
- ATM fees at that bank’s branches and at other banks’ ATM machines, and
- all other fees, for example, a returned mail fee, closing an account early fee, or fees for using a human teller.
Then compare fees for several credit unions and banks. You can find this information for some banks on websites like www.bankrate.com. You can get information from local credit unions and community banks by reviewing their websites or visiting a nearby branch.
Once you have all the information, choose an account that works with the way you’ll use it.
If you use ATMs a lot, for example, look for a bank or credit union that does not charge for using its own ATMs and reimburses you for ATM charges from other banks. Also, do not authorize overdrafts or overdraft protection, because it can cause you to pay high fees for overdrafts or for the overdraft protection service.
If You Can't Get an Account Because of Previous Bad Checks
You might be denied an account, however, if you have a bad check writing history. Most banks will check your check writing history with a check verification company before they will open an account for you.
Here's what to do if you are denied a bank account because of information provided by a check verification company:
- Get the contact information for the check verification company from the bank.
- Contact the check verification company to get a copy of your credit report.
- If you can’t resolve the problem informally, you can dispute incomplete or inaccurate information in the company’s files just as you can with a credit reporting agency by sending a dispute letter.
Don’t Bounce Checks
If you open a checking account, be very careful not to bounce checks. A federal law called “Check 21” allows banks to process electronic images of checks instead of the paper originals. One result is that checks clear much faster than in the past. To avoid bouncing checks, don't write a check unless you know the funds are already in the account to cover it.
Although checking account information is not included in credit reports prepared by the three nationwide credit reporting agencies, if you bounce a check to a creditor, it most likely will report a late or missed payment to a credit reporting agency, jeopardizing your hard work to repair your credit. A history of bounced checks also may make it harder to open bank accounts in the future.
To learn more about credit reports and rebuilding credit, visit our Credit Repair area.
This is an excerpt from Credit Repair, by Margaret Reiter and Robin Leonard (Nolo).