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What is second chance banking?

For those who don’t meet approval requirements for other bank accounts, second chance banking may offer an opportunity to enjoy many of the same features if eligibility requirements are met. Let’s learn more about these accounts.

Why is second chance banking important?

When you use a checking account, your account activity goes into a reporting system called ChexSystems. Financial institutions utilize these ChexSystems reports in a similar way to lenders examining credit reports when evaluating applicants. Certain activities on your checking accounts, such as a history of overdrafts or an involuntary account closure, could affect your eligibility for opening new accounts.

Second chance banking helps bridge the gap in banking that impacts low-income communities, minorities and those previously incarcerated. For example, keeping up with bank fees or minimum balances isn’t always feasible for lower-income customers. ID requirements and personal history can also be a potential barrier, particularly for non-residents or the formerly incarcerated.

Second chance bank accounts offer these customers access to many critical banking services which may include reduced-fee structures and lower minimum balance requirements. A second chance account can also help you build up your positive banking history with ChexSystems. In time, you may be approved for other bank account types.

How does second chance banking work?

When evaluating second chance bank account applicants, institutions typically don’t look at (or are willing to look past) your ChexSystems report. Although banks don’t look at previous ChexSystems activity for your application, they’ll still report your ongoing activity if you do decide to open a second chance account with them. This may help you build up a positive history with ChexSystems as you use the account over time. A second chance account may help you access essential banking services while you give your older reports time to clear from your ChexSystems profile.

Considerations for second chance bank accounts

Although second chance banking is made to be accessible, there may still be some monthly fees on your account. Some services and features may be restricted, as well. Overdrawing your account is often limited since one of the account's purposes is to help you build a positive history and avoid overdrawing your account. Individual financial institutions may have additional, specific limitations and requirements. It's helpful to inquire about these specifics before committing to an account.

Here are a few things you may want to look out for:

  • Low or no monthly fees.
  • Low minimum balance requirements.
  • Low or no cost for services, like debit card access and online bill pay.
  • Relatively few restrictions (like a monthly transaction limit, for instance) on the account.

Every institution has its own unique take on what a second chance account should offer. You may find this means prioritizing some of the considerations over others, depending on what suits your needs. Second chance bank accounts are also offered under a lot of different names. As such, it may be beneficial to double-check with your bank or credit union to see if they offer this account type under an alternative name.

In summary

A blemished banking history can make it difficult to get approved for a new account. People who find themselves in this situation may be eligible for a second chance bank account as an alternative. Though some features may be limited, second chance bank accounts offer access to many crucial services, such as debit card access. As you use the account, you’ll build up your positive history with ChexSystems. In time, this could help improve your banking history.

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