Do you need a second-chance checking account?

Just about every account you open is monitored for your credit history. Got a credit card? It’s being reported to a credit bureau. Checking accounts are no exception.

Many banks report checking account infractions, such as carrying a negative balance for a long period, to reporting agencies like ChexSystems and Early Warning Services. Once you get reported to one of these agencies, it may be difficult to open a traditional checking account.

If you’ve been denied an account, a second-chance checking account provides a way to reestablish your creditworthiness.

What is a second-chance checking account?

If your checking account was “involuntarily closed” due to an unpaid balance or if you’ve had overdrafts, that information is reported to consumer agencies that keep track of such information. Your application to open an account could be denied because of what’s in your file.

If so, you may need a second-chance checking account, which is a basic checking account with restricted features. Banks that offer these accounts may not pull your ChexSystems or Early Warning Services report, or they may choose to overlook some issues.

A second-chance checking account can help you reestablish your credibility and regain access to the money management tools that come with having a bank account.

How a second-chance checking account works

When you don’t have a bank account, you might have to rely on expensive services like check cashing or buying money orders to pay bills. Second-chance checking accounts help you manage daily aspects of your financial life, such as receiving direct deposits, using a debit card for purchases, and setting up automatic payments for bills.

But second-chance checking accounts don’t always come with the full range of features you can expect with a traditional checking account. For example, with a second-chance checking account, some banks may:

• Not offer overdraft protection
• Limit amounts on ATM withdrawals
• Limit automatic bill payments
• Impose monthly maintenance fees

You can use your second-chance checking account until enough time passes that the adverse information reported in your file no longer impacts your credit score. You then may be able to upgrade to another account type. Some banks might help you change your second-chance checking account into a regular account.

Alternatives to a second-chance checking account

If you don’t like the idea of getting a second-chance checking account, an alternative is a prepaid debit card, which provides some of the services offered by traditional bank accounts.

You can purchase a prepaid debit card from numerous places, including stores, banks, and credit card providers, and reload the card by setting up direct deposit, depositing checks at an ATM, or providing cash at a store. Your employer may also offer the option of having your paycheck automatically loaded onto a debit card, and most states offer the same option for payment of unemployment benefits. You can use a prepaid debit card for daily purchases and to withdraw cash from an ATM—just like a debit card that comes with a traditional checking account.

But note that prepaid cards often come with monthly fees, which could be higher than the monthly maintenance fee with a second-chance checking account. Consider your options and compare fees before deciding whether to get a prepaid debit card instead of a second-chance account.

Which banks offer second-chance checking accounts?

Not every bank offers a second-chance account, so you may need to consider an online-only bank. Some institutions don’t advertise second-chance accounts, so if you are denied a checking account at a smaller bank or credit union, ask if they offer an option for customers looking to rebuild their credit.

You could also find a bank that doesn’t use ChexSystems or Early Warning Services as part of the application process for opening a traditional checking account. Some banks* that offer accounts to those who might be denied more traditional services include Capital One (COF), Wells Fargo, Varo, and Chime. The accounts may not offer as many bells and whistles, but they still provide necessary features.

Steps to opening a second-chance checking account

If you decide a second-chance checking account is right for you, there are some steps you can take to move forward:

1. Compare accounts. Shop around. Compare the features of different second-chance checking accounts and review the fees. Some of these accounts will come close to offering a full suite of checking services, while others are limited. Look for a balance between what you can afford and what you need.
2. Fill out an application. Many banks that offer second-chance accounts allow you to open an account online, or if they have branches, you can open an account in person. Either way, you’ll need to have a government-issued ID, know your Social Security number, and be prepared to share information like your address and phone number.
3. Fund the account. If you’re opening the account in person, you can usually bring cash to use as an opening deposit. If you open the account online, you may need to send a money order or set up direct deposit from your workplace instead of depositing cash.

The bottom line

You might be frustrated when a bank won’t let you open a checking account. The good news is that you can probably open a second-chance checking account—although you might have to settle for fewer features. If you have been denied a checking account, you’re entitled to see a copy of the report that prompted the rejection. You can also review your consumer report once a year for free to see if there are any errors or red flags.

By knowing where you stand, you’re more likely to get access to the financial products and services you want in the future.

*Note: Examples used in this article are for educational purposes only and are not an endorsement of any of the companies mentioned.