How Does Credit Work on a Bank Account?
- When a bank opens a new account, it assumes the risk that the person opening the account may abuse it and cost the bank money by writing bad checks and causing the account to go into the negative. Since banks are not legally required to open accounts for everyone, many banks check your credit report before you open an account. If you have bad credit, a bank can refuse to open an account for you on the basis that you have a history of mishandling your financial affairs.
- If you overdraw your bank account, then you become indebted to the bank, and if you fail to repay that debt, the bank can close and charge off your account. When a bank charges off an account, it simply updates its accounts to reflect the fact that the account owner seems unlikely to settle the debt. However, you are still responsible for paying off a charged off account, and, in an effort to encourage you to do so, banks report charged off accounts to credit bureaus.
- A charged off bank account, like any negative credit event, can remain on your credit report for seven years. Other banks can use the charged off account as a reason to turn you down when you try to open other new deposit accounts. Additionally, charged off accounts cause your credit score to fall, and this may mean you are not eligible to obtain new credit cards, home loans and other types of credit for several years.
- Some banks do not check your credit score when you open an account and do not report your charged off accounts to credit bureaus. However, these banks usually order a consumer report from a company called ChexSystems. This firm compiles consumer reports that only contain information related to deposit accounts. A ChexSystems report will enable a bank to see if you have failed to settle overdrawn accounts at other banks and even if you have a history of overdrawing your account. Therefore, even when no credit reports are involved, your account history can cause problems for you in the future.
