Who's watching your bounced checks?

Overdrawn? Your name could end up in a national database warning away banks and lenders. Here's what you can do about it.

Irresponsibility breeds consequences.

Too many traffic tickets and you'll lose your driver's license. Too many wrecks and your insurance company will drop you like a hot potato.

The same is true of your checking account. Too many overdrafts and your bank may close your account "with cause," meaning you just crossed over from valued customer to liability.

From there, it gets worse.

If your bank or credit union belongs to the ChexSystems network, as roughly 80% of the nation's financial institutions do, a record of that account closure will be promptly entered into the ChexSystems database, where it will remain for five years, warning banks, lenders and even potential employers that you could be a credit risk.

Quietly tracking
You may never hear the name ChexSystems until you try to open a checking account elsewhere and are turned down. Again. And again. And again. At which point this altogether unassuming consumer-reporting company can seem like the Devil incarnate, out to ruin your credit rating, your reputation, even your life.

"It can haunt you for years," says Steve Rhode, founder of Myvesta, formerly called Debt Counselors of America. "On the one hand, it does serve a very good, legitimate service in that it's supposed to be a recordkeeping system of exactly how responsible you are with bank transactions. On the other hand, you can find yourself on the database and when you go to the grocery store they won't honor your check."

How can you save yourself from five years in financial purgatory? There's now a way, even if you ended up in ChexSystems by your own hand.

But first, let's meet ChexSystems. After all, better the devil you know than the devil you don't.

An unlikely villain
Few financial topics (with the exception of ATM surcharges) have raised the public ire to the degree that ChexSystems has in recent years.

Opponents to ChexSystems tend to fall into two camps: those who ended up on the database legitimately but feel their five-year sentence is too stiff, and those who erroneously found their way onto the ChexSystems list and had a whale of a time getting off of it.

Lisa Nelson, chief privacy officer for parent company Efunds, fields most of the media heat. In January 2001, Deluxe Corp., a major check printer, spun off Efunds, its transaction-oriented business that includes ChexSystems, the SCAN check verification network and DebitBureau, which combines bank-fed and merchant-fed databases into an extensive risk-management system.

Nelson says that, as a consumer-reporting agency, ChexSystems compiles the facts on closed-for-cause accounts from some 90,000 bank and credit union locations nationwide and makes this data available to its members. ChexSystems is regulated by the Fair Credit Reporting Act (see link at left) in much the same manner as credit bureaus.

Controlling checking costs
Banks rely on ChexSystems primarily to help them screen applicants for new accounts, especially checking accounts. Checking accounts don't generate much money for banks; many institutions offer them free in hopes of enticing you to invest in more lucrative products.

But issued indiscriminately, checking accounts can expose the bank to considerable fraud and eat into profitability. According to a September 2000 report by Tower Group, financial institutions were hit for an estimated $1.3 billion in check fraud in 1998. Merchants lost an estimated $13 billion to bad checks that same year.

Since past account problems are considered a key predictor of potential risk, many (though not all) member banks will deny an account based on a ChexSystems report.

In these scenarios, the customer frequently considers ChexSystems the bad guy even though it has nothing to do with any decision a financial institution might make based on information in its database.

"The data that is stored within ChexSystems is factual, accurate data; it's what happened. Now, how the bank uses that information is completely at their discretion," says Nelson. "Just because there is an account closure on file in ChexSystems is not an automatic decline at every bank. Each financial institution sets its own parameters."

Sympathy for the devil
So why is everybody yelling at ChexSystems?

Two reasons: It seems egregious that a few overdrafts theoretically could land you on a blacklist for five years, and once on that list, it can be nearly impossible to get off of it.

Here again, both problems reside primarily with the banks, not ChexSystems. The bank decided to close your account based on its own policies and procedures, not ChexSystems'. It and other banks are perfectly free to give you a second chance. And although ChexSystems asks its members to remove inaccurate entries and note when an outstanding debt has been paid, banks are under no obligation to show you this small kindness.

Blaming ChexSystems for preventing you from obtaining a checking account is a bit like blaming the TV weatherman for the weather; they just report it, and are rightly focused on maintaining the integrity of the information.

"The (banking) industry has responded to some degree by placing filters on the data they draw out," says Nelson. "For example, I may be an institution that doesn't want to see any closure files that were less than $100. Our approach has been not to impact the data itself; if you want to make that change in how you use that data, that is every bank and credit union's prerogative. We are only removing inaccurate reports."

If you happened upon its list by error, ChexSystems will help you square things with your bank and remove you from the database. Contact ChexSystems through its customer service Web site (through the link at left) where most can order a consumer report for an $8 fee (Connecticut residents pay $5; Maine residents $3; Colorado, Georgia, Maryland, Massachusetts, New Jersey and Vermont receive free reports).

Early parole from purgatory
Those who wound up on ChexSystems' database legitimately once had limited options. The company allows you to insert an explanatory note to explain extenuating circumstances, but it won't delete or alter a factual listing unless instructed to do so by the closing bank. Otherwise, you could hunt for a non-ChexSystems bank, try your luck with an online bank or have friends or relatives cash your checks for you -- meager options indeed.

But times have changed in the banking industry. Today, banks compete for your business. They don't want to turn you down, but neither do they want to entrust a low-margin product to a high-risk consumer.

To help its member financial institutions resolve this dilemma, and to take a little heat off themselves, ChexSystems recently joined with consumer advocates, credit counselors and a University of Wisconsin pilot program to develop a service called About Checking (see link at left under "Related Sites"). The goal: Give those on its blacklist an opportunity for early parole from purgatory by enabling them to earn back their checking account.

"If a consumer is on our closure database, they can go to a class, and if they successfully complete that class and pay off all outstanding debts to the financial institution where the account was originally closed, then they are able, through the participating bank or credit union, to open up a new account and basically have a second chance," says Nelson.

The national program has rolled out in 15 states so far. It will be some relief to ChexSystems when it can offer an alternative to its five-year mandatory sentence for folks who just plain made a mistake.

A wake-up call
Myvesta's Rhode thinks it's a good move.

"Credit reports originally began with somebody who would actually go and interview your employer and your neighbors and not only talk about your ability to borrow and repay, but also your character," he says. "That was all kind of phased out, we took the whole character thing out of it. Now we're putting it right back in."

According to Rhode, some of the 15% to 20% of the population that routinely mangles checkbooks actually need the kind of wake-up call that ChexSystems delivers.

"As funny as it sounds, it actually is more of an advantage to you to have that happen because you may never look at your credit report," he says. "Most people are unaware that a negative credit report or low credit score actually increases your cost and access to things like car insurance. The insurance companies use your credit report as an indicator of insurability."

Nelson hopes About Checking can turn ChexSystems from a devil to an angel.

"There is a whole bunch of people who just have never had a fundamental understanding of even how the banking system works," she says. "We're taking that opportunity very seriously. I think we can make an impact in the consumer population in terms of managing their debit account because the better job we can do in terms of educating consumers, the better we're serving our customers. And it's a good thing to do."

The above article was written by Bankrate .com who is one of the Web’s leading aggregators of information on more than 100 financial products including mortgages, credit cards, automobile loans, money market accounts, certificates of deposit and banking fees. Bankrate.com is part of Bankrate Inc. of North Palm Beach, Fla.