Opening a checking account with bad credit can be a hurdle. Understanding consumer credit reports can help you to make better decisions.
Understanding the Key Concepts
Before we dive into opening a checking account with bad credit, we really need to understand how credit is determined, so we know what needs to be fixed. Without knowing what to fix, it would be impossible to correct it.
Understanding consumer credit reports (there are several), how they are used, when they are used, and why they are used can help those with bad credit determine what went wrong and how to avoid future issues.
Likewise, consumers must demonstrate their responsibility with credit (which is other people’s money) before opening an account with a bank or credit union.
Credit reports are a person’s financial history. A score is generated from this called a “FICO” score. The FICO is an acronym for the Fair Isaac Corporation, the business that originated the credit reporting and scoring mechanisms that creditors use today. Credit scores range from 350-850, with higher scores preferred.
However, FICO is the most formal credit scoring system, but is not the only consumer reporting system. Many credit monitoring services like Credit Karma provide a Vantage 3 score. This score is close to a consumer’s FICO number, but is not the same. The advantages of a Vantage 3 score is its informality.
A FICO is typically pulled with all three credit bureaus reporting when a person applies for credit. Put simply: the person is requesting credit, or a loan of some kind (car, mortgage, credit card, personal loan) so the full credit history of the consumer is very important.
Sites that use the Vantage 3 score are not pulling the full FICO because there is no credit decision associated with the request – the consumer or business just wants a rough idea of where the consumer stands. With a Vantage 3 score, less complete information is available, but the score is surprisingly close to the FICO score.
There are two types of consumer credit “pulls”: hard pull and soft pull. Hard pulls are full FICO scores and credit pulls associated with a consumer requesting to borrow money. A soft pull is used to verify basic information and is not associated with full credit reports but will use public information to ensure a person is who they say they are.
Chexsystems Report is based on non-credit consumer activity within banking accounts. The FACTA report indicates open and closed banking accounts which may indicate other financial issues that do not involve credit. This is a “soft pull” and accessing the report is free and easy after some cursory questions.
Demonstrating Responsibility and Credit Worthiness
Consumers with bad credit have struggled or made mistakes with their credit and financial relationships. It’s not always a consumer’s fault, but it is their responsibility to correct any issues with their credit.
What lenders, whether it’s a bank, credit card company, or even an apartment complex want to see if that if a consumer is lent money, that they will pay it back. One way to do this is by using just a little bit of a consumer’s available credit. Creditors want to see that a borrower can pay back what they owe, but using a large amount of available credit can be a danger sign.
Banks and Credit Unions
While similar, banks and credit unions are not the same thing. They both offer customers similar financial products like checking accounts, savings accounts, and investment accounts. The two diverge in how they determine what opportunities to extend to in the form of credit.
Credit unions offer credit to their customers (members) based on their relationship with the credit union. This may include requirements such as the consumer reports outlined above, but credit unions aren’t bound to those limitations.
A bank offering regular checking accounts often charges account holders for maintenance of those accounts in addition to other costs like overdraft fees.
Credit unions may require membership obtained by being a part of a particular group such as a union, government agency, or resident of a state. For those who are able to join, fees are typically lower and may include additional benefits such as unlimited check writing.
Monitoring Your Credit Score, Improvement
One easy way to improve credit and demonstrate that a client can be trusted with the bank’s money is to start with the customer’s own funds. For example, a secured credit card requires a deposit from the customer, usually a few hundred dollars. When they use the credit card and then pay it back, they are paying themselves back for the money they borrowed from their deposit. After some time, demonstrating effective use of this behavior, the deposit may be refunded, and additional credit may be extended.
This method is effective, because secured credit cards are easy to obtain, build positive credit history, and limit exposure. Secured credit cards are not the same thing as prepaid debit cards which do not improve credit scores.
How to Opening a Checking Account with Bad Credit
Credit unions are particularly helpful for those with bad or challenged credit. Cambio is backed by a credit union and operates with a similar ethos. The easiest way to open a checking account if you’re in this situation is to seek out a second chance bank account.
Second chance checking accounts gives those who have had issues in the past an opportunity to easily manage their money in a safe environment. These accounts have systems in place to facilitate a return to better internal credit facilities that can give customers or members with lower credit scores a chance to prove that they deserve higher credit limits and can handle larger amounts of debt.
Cambio offers second chance checking accounts with a helpful twist. By giving members opportunities to complete financial health activities and demonstrate they can handle money challenges, Cambio is able to create a consumer report score that its member credit unions can utilize to make lending decisions. In doing so, Cambio, and others like it can be the bridge consumers need to get them the credit they have demonstrated they deserve.
Account applications can be a daunting task for consumers with bad credit. But opening an account with bad credit can remain an opportunity through second chance banking, secured credit, and rewards from companies like Cambio.
Understanding the pieces that affect credit scores, is part of what will ultimately make borrowers more successful in the future. They must have both the chance to repair their credit and they must also take the opportunity to do so.