Some households never bother to apply for a bank account, citing mistrust of the mainstream banking system or bank fees as reasons why they don’t want a bank account. Others who want a checking account found themselves refused a bank account the last time they applied.
According to the most recent survey conducted by the Federal Deposit Insurance Corporation (FDIC) more than a quarter of U.S. households are either unbanked or underbanked.
Reasons for Being Denied a Checking Account
Banks deny applicants for a checking account for only a few reasons.
- Most commonly, applicants are denied because they have an outstanding balance with another bank, often from unpaid fees.
- Banks also decline new accounts because the applicant accrued too many overdrafts with their previous bank.
- You can also be denied if you have bad credit generally.
Fortunately, you have plenty of options if you’re ready to turn over a new leaf.
What to Do If You Can’t Open a Bank Account
Step 1: Find Out Why You Were Denied
When you go to open a checking account, most banks check either your credit report, a similar banking history report from ChexSystems, or both.
ChexSystems maintains files on consumers similar to credit reports, but they exclusively contain negative banking history data. If you rack up unpaid bank fees and skip out on your bank account with a negative balance, the bank reports you to ChexSystems.
Yes, bad banking behavior follows you from bank to bank. The good news is that you can pull a copy of this report for free once per year, just like your standard credit reports, because ChexSystems’ report falls under the Fair Credit Reporting Act regulation.
You can request a copy of your report once a year for free at ChexSystems.com. Unlike your credit report, it should be short and succinct, containing only your banking transgressions. You can see exactly which banks reported negative information about you, and details about those offenses.
You’re less likely to find errors on your ChexSystems report than on your credit report. But just as you can fix errors on your credit report for free, you can follow a similar dispute process with ChexSystems if you do find mistakes.
More likely, you’ll find legitimate transgressions. In that case, contact your previous banks, and negotiate a payment arrangement with them. As part of the negotiation, insist that they report your balance as paid in full, with both the credit bureaus and ChexSystems.
And, of course, ask your new bank why they declined you. They may tell you that it had more to do with your credit report rather than your banking history, in which case you can focus your efforts on improving your credit (more on that shortly).
Step 2: Overhaul Your Monthly Budget
The cold, hard truth is that people with healthy budgets don’t rack up overdraft fees or other bank fees. If you have bad credit or a negative banking history, you’re doing something wrong.
Before you ruin another banking relationship, you need to address the root of the problem: your monthly budget.
In most cases, poor budgeting comes down to overspending. Different people overspend in different ways, but when they first go to fix their budget, they typically start by looking for minor tweaks. They look for a $10 subscription they can cancel, or they start packing lunch three days a week instead of two.
Although minor tweaks are worth making, they won’t turn your budget around. Instead, throw out your old budget entirely and create a new budget from scratch.
First, calculate four weeks of your after-tax income — the only amount you can count on in any given month — as your monthly revenue.
Next, enter your target savings rate — the percent of that income that you want to save each month.
Then, and only then, should you start entering expenses.
Don’t ignore irregular expenses that don’t pop up every month but still hit you every year. These include gifts (such as holiday gifts, birthday gifts, wedding gifts, and shower gifts), insurance premiums, home repairs, and car repairs. They aren’t surprises, and you need to budget for them.
With a stable, sustainable monthly budget, you can pay off high-interest debts and build an emergency fund. With that solid footing, you can start working toward your other financial goals.
Step 3: Boost Your Income
A healthy budget works wonders for your personal finances, but you have fewer options if you don’t earn much money. If better budgeting serves as playing defense, earning more money amounts to playing offense.
Start by boosting your immediate income with a side hustle. One easy way to start is through apps that help you take advantage of the sharing economy. Many require little or no startup capital or special skills, so anyone can use them to immediately earn some extra money each month.
For even more ideas, review some of the most popular side gigs.
If you ultimately want to earn a higher salary at your day job, start thinking about what your ideal career might look like. No one says you have to change careers overnight, but invest some time exploring new career ideas. It may involve earning certifications or a degree or simply taking an entry-level job in the new field and learning on the job.
Step 4: Improve Your Credit
Many banks check your credit report before allowing you to open a checking account. Banking aside, good credit helps you qualify for a mortgage with a lower interest rate and for auto loans.
Start by checking your credit report for free and looking for errors. Disputing errors remains the fastest way to improve your credit score.
The credit bureaus start penalizing your score if you keep credit card balances over 30% of the card limits. Another quick way to fix your credit is to pay down all card balances below 30% of their limit.
The higher your savings rate, the faster you can pay off unsecured debts, which both saves you money and boosts your credit score. Try the debt snowball method to knock out high-interest debts quickly.
Most important of all, pay all bills on time. With a careful budget, that becomes easier, and you can even automate your monthly payments. A history of on-time payments gives another big boost to your credit score. Make sure you also sign up for a free Experian Boost account. They will use pay payment history from things like your cable bill or Netflix to calculate your credit score.
If you haven’t yet established much credit, you can do so with a secured credit card or credit-builder loan from Self. A secured credit card is simply a card backed by collateral, meaning you give the credit card company some cash to hold (more on that shortly).
With credit-builder loans, you effectively lend money to yourself. You agree to make monthly payments for a certain period of time, and the “lender” simply puts them aside for you. They report your on-time monthly payments and give you your money back at the end of the agreed-upon term.
Read up on other ways to build credit fast, and remember that your first priority is to make all payments on time.
Step 5: Open an Operating Account
In today’s world, you have plenty of options for accounts to pay your bills and manage day-to-day expenses. Although checking accounts make the most sense for an operating account, you can use other account types instead if necessary.
You ideally want an account with the following features:
- Debit Card: It’s safer to walk around with a debit card than $500 in cash in your wallet. Debit cards let you quickly and safely make payments both online and in person, as well as withdraw cash from an ATM when needed.
- Direct Deposit. Receiving direct deposits from your employer, rather than having to find someone to physically cash your checks, makes your life easier.
- Write Checks. Although we increasingly live in a world of digital money transfers, you occasionally need to write a paper check.
- Send Payments. From sending electronic payments via ACH to online bill pay services, you can minimize paper checks by sending money quickly and safely online.
- No or Low Minimum Balances. Some banks hit you with fees if your account drops below a certain minimum balance. Avoid these banks when possible.
- Low Fees. Everyone hates banking fees. An ideal account charges no account opening fee, no monthly maintenance fee, no annual fee, no ATM fees at ATMs near you, and low overdraft fees.
Alternative Account Options
1. Second Chance Checking Accounts
Some banks offer “second chance” checking accounts designed specifically for people who burned their banking bridges and can’t open a standard checking account. In some cases, they run your ChexSystems report but apply more forgiving standards to it. In others, they don’t pull your ChexSystems report at all.
Of course, banks take a risk by servicing customers with a history of unpaid fees. And they charge accordingly, typically through higher monthly fees.
Although far from an exhaustive list, the following banks offer second chance checking accounts for those with a patchy banking history.
2. Online Checking Accounts
Nowadays, traditional banks and credit unions aren’t your only option for checking. Several online banks have created a name for themselves as trustworthy alternatives to brick-and-mortar banks.
When you think about it, little banking takes place in person nowadays. You can deposit checks with mobile banking apps. You send and receive money electronically.
There’s only one banking activity that requires in-person interaction, and that’s cash withdrawal, which online banks handle by partnering with existing ATM networks. They pay usage fees for these existing networks to allow you fee-free ATM access, which still costs them less than maintaining physical bank branches.
So why wait in line at a physical bank? Enter the 21st century and try an online bank.
3. Reloadable Debit Cards
Technically, you can get by with a prepaid debit card and not open a checking account at all. Many of today’s prepaid debit cards offer similar features to checking accounts.
You can, of course, swipe them while shopping or use them at an ATM to withdraw cash. Many allow you to set up your paycheck direct deposit into the card account, so you don’t even have to load money onto it.
One of the better reloadable cards on the market comes from Bluebird, offered by American Express through a partnership with Walmart. In addition to allowing direct deposit, they also feature online banking, bill pay, and even let you write paper checks.
Bluebird doesn’t charge monthly or annual fees or a fee to load cash on your card — if you do so at a Walmart. If you load cash to your card elsewhere, they charge $3.95.
They also let you transfer money, although that too comes with fees.
Make no mistake: Reloadable debit cards don’t offer the same features as a real checking account, and they cost more. But if you don’t want to participate in the banking system for your own reasons, you can get by with a reloadable debit card.
4. Secured Credit Cards
Although not exactly a checking alternative, secured credit cards can still serve you in several crucial ways.
First, they can help you build or improve your credit, particularly when traditional credit card companies turn you away. Secured credit cards require you to deposit cash with the company as collateral against default, but they otherwise function as normal credit cards and report to the credit bureaus.
Consider secured cards as one more tool in your toolkit. They’re a way to improve your credit and a fix to hold you over while you find a checking account to use as a long-term banking solution.
5. The Cash Envelope System
Although we live in the era of digital money, that doesn’t mean you can’t live on cash.
The envelope budgeting system remains an oldie-but-goodie. In this system, you keep a separate envelope of cash for each type of expense in your monthly budget. When you run out of money in a given envelope, you can’t spend any more in that expense category until next month.
It works because it makes your budget tangible on a gut level. You get to see your money move in and out of your budget and touch it with your own hands. It forces you to truly understand your personal cash flow.
Unfortunately, it makes some transactions inconvenient in today’s world and blocks others entirely. Unless your mortgage is with a local community bank, you can’t show up with your monthly mortgage payment in cash.
Even if you can, you probably don’t want to drive across town to do so. That means you probably need to convert cash to a money order and then mail that money order to your lender.
Online shopping also presents a challenge for a cash-only customer.
The envelope budgeting system works well as a temporary measure to force you to learn how to budget. Once you master the basics of budgeting, you’ll probably want to transition to a checking account and a third-party budgeting app.
Final Word
Life is hard without a checking account. Whether you found yourself turned down because of your previous banking history or you worry you don’t have enough money to maintain a minimum balance, you have plenty of options for alternative checking accounts that don’t run a ChexSystems report on you or require a minimum balance.
You can use an alternative checking account to receive paychecks, pay bills, and pay for your day-to-day needs. Just as importantly, you can use it to set up automated payments to pay down credit card balances, build an emergency fund, and invest through a brokerage account. When combined with a robo-advisor, you can even use it to automate your investments.
A checking account proves a critical tool in your quest to build wealth. You can technically live without one, but it makes it far harder to pay bills, save money, and invest for your long-term goals.
