The Credit Report You Never Knew You Had, And How It Can Victimize You

Natalie Martin has a post up at Credit Slips about an paper by Ginger Chouinard on a form of credit reporting that has managed to remain beneath the policy radar despite its considerable importance, and how it can do even more harm that the sort we’ve all come to know and hate.

This is Martin’s overview:

nearly 90% of financial institutions use ChexSystems or similar reports in their account opening process, yet they are under no duty to disclose this to consumers until an account is denied due to information contained in the report. For those consumers denied accounts, it is too late. They had no idea information was being collected on their checking account usage, much less that it could be used to deny them an account in the future, and are subsequently forced to go outside the mainstream and use expensive alternatives like check cashing services and money orders to conduct their everyday financial business…

Unlike credit reports, little positive account information is included in an account screening report. The report provides no account details such as where the consumer has had a checking accounts, account opening dates, or voluntary account closure dates. With respect to account usage, the report essentially contains only negative information such as involuntary account closures or returned check information. For example, a consumer may have successfully managed the checking accounts for 20 years. After a job layoff, the consumer may have had his/her checking account closed for a negative balance. The report for this consumer would just show that closure and not the fact that the consumer had been a responsible checking account user for most of his or her financial life.

And the article itself makes clear these reports are very powerful:

A quarter of the banks surveyed reject an account application automatically if an account screening report contains any negative information. Further, only 25% of banks offered a “second chance” account to consumers whose reports contain negative information…

Since many financial institutions refuse to open an account if negative information is contained in a ChexSystems’ report, the impact on the consumer can be huge. In today’s world, access to the financial services market is considered essential to entering into and remaining in the middle class, and having a bank account is a first step towards credit services, which in turn allow a consumer to build assets. Being “unbanked” also means a consumer has no convenient or safe way to save and has limited access to modern payment systems.

An unbanked consumer must resort to costly alternatives like check cashing services, prepaid debit cards, money orders, payday lenders, and title lenders to handle his daily financial needs. While some states regulate check cashing fees, others do not, and consumers can pay anywhere from 1% to 5% of their check amount to cash their paychecks at check cashers, with even more dollars being spent to purchase money orders to pay bills. The result? A household with a net income of $20,000, cashing biweekly paychecks and purchasing an average of six money orders per month, could end up paying as much as $1,200 annually for these services, an outrageous amount in any respect.

ChexSystems says it is a consumer reporting agency, but the paper discusses some ways that CRA protections may not be applicable, since they provide to credit reporting, and opening a checking account is not a credit transaction.

I strongly suggest you read the article in full. It is a quick and important read.

The “Other” Credit Report: What You Don’t Know Can Hurt You by Ginger Chouinard by

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  1. Klassy!

    I was unaware that I had any problems with my credit– had changed a checking account with one bank to a credit union without trouble. A year later I tried to open a savings account at a bank and was rejected. They would not tell me why. So, I spent a pleasant few days making phone calls. Nobody was very helpful, but it was finally pegged to a bad check passed a few years back at a dollar store in a city two hours away from a checking account from a bank that did not have a presence in my city. The manager at the Dollar store was responsive and did take my word that I’d never been there and never even had a checking account from that bank. He reported the error. As for the credit reporting agencies and Chexsystems it was like pulling teeth to get any info.

    1. Klassy!

      I meant to say, if you had looked at my credit report from one of the reporting agencies you would have absolutely no idea there was any trouble. Chexsystems really keeps you in the dark.

        1. ditto

          I had a similar but worse experience with Chex system when trying to open a bank account years ago. They had me as passing several bad checks to a walmart far far away on an account with a bank I had never done business with. The system for trying to get it fixed was so broken and awful I gave up trying to fix it and told the bank, which had a brokerage I was already using, that I would pull everything if they failed to open the account, which they did. Since then I have had no trouble opening accounts so I guess it faded away, resolved itself, or most institutions have realized how bad the chex system is and don’t use it.

  2. fresno dan

    for a list (and not ALL the entities collecting information on you)

    The problem is that some of these guys play all sorts of games in supplying the “free” credit and financial reports, and giving you the report you are entitled to “by law”.
    I finally wrote to the FTC, than my congressman and representative. I got a letter back from Montgomery county Maryland that was a total non-sequitor.
    Anyway, if you do find any incorrect information, just try getting it fixed…

    1. MRW

      I talked to a paralegal (working for a credit repair lawyer my friend was using) who had worked with one of the big three credit-rating companies, like Experion, etc., for years. I don’t remember the name because I was dumbstruck by the info.

      She said they throw any requests to attach letters to your file as an explanation of circumstances in the garbage.

      I said All of the agencies? She said All of them. I said Isn’t it the law? She said No, it’s a service. And they couldn’t be bothered because they come from individuals, are usually long rambling things about what happened, and it’s too much a pain in the ass to scan and file.

    2. Laughing_Fascist

      Happened to me recently. First I can’t log on to the official site to get your free annual credit reports because “access to this site is not permitted from your location.” I was out of the country. Along with 10,000,000 others who live/work outside the U.S.

      So I tried to buy my report at Experian’s site. Experian let me use my card to buy it, then, after taking my money online, suddenly they want to verify I am who I say I am. They ask me info about an account from 1995. How am I supposed to know the amount of my monthly payment from a loan back in 95. Well I did know cause I had a copy of an old credit report.

      After providing the correct answers to their invasive and stupid questions, I get the message “you will have to call to get your report.” I suspect they want me to call so they can hard-sell me one of their ridiculous $19 per month “credit monitoring” services (that would be over $220 a year). Experian is a scam company. But I suppose its very easy for a creditor to incorrectly report a non-payment (which is why I was spending hours trying to get my report) so its a useful service for someone anyway.

      1. Denise B

        Social Security is now using Experian to verify the identity of people trying to create online accounts. They asked me questions about a Visa account that had been closed for fifteen years that I had no records for anymore. They asked me to identify a street I’d once lived on which was actually a street I’d once worked on, so I got that wrong. And they asked me to identify a cell phone number that was probably a work phone from ten years back which I could no longer remember.

        Luckily, I still had an Experian report from 2005 that I could consult to get the right answers on the third try.

        1. Lambert Strether

          Oh, man. I am going to be so fucked. I’ll probably have to pay a lawyer to get access to my own money. And I love the way they’re screwing the expats — the country explains in the clearest possible to them, that they should leave, they’re no longer welcome, and then they pick their pockets on the way out, for good measure. Just unbelievable.

          Adding… Now I see the advantage of forcing everybody online, too. I used to think that they’d try something like dynamic chained CPI, where they varied benefits by cost of living (so-called) in near-real time — Cat food down two cents? Benefits down two cents! — but now I see the additional advantage that they’ll be able to screw a few million citizens out of their money. This is the operational definition of “the actuarial soundness of Social Security.”

      2. LifelongLib

        I had a similar experience trying to get a credit report, being asked about some loan that had been paid off several years before. I guess they figure everybody has his credit history memorized.

  3. OMF

    I will play Devil’s Advocate here, but I am partly sincere.

    Is there really a problem with banks refusing to give out more credit? Part of the problem in the financial crisis is that easy access to credit was being used, unsustainably, to paper over systemic inequalities in the economy and in society. Poorer people were placated(and later gouged) with easy credit cards and finance plans, reforms were deferred, and deeper decay set in.

    If Econned, Yves talked about easy access to credit being like a super “XCrop” in agriculture, which was amazingly easy and efficient to produce, gave tons of calories, but ended up causing cancer in the end. But the whole world had become dependant on it in the meantime.

    Moving away from XCrop, from credit, was always going to be hard. If some rotten process in the banks, like credit reports, is in its own perverse way helping to stave us all off this addiction to money, should we be so quick to crack down on it?

    1. Yves Smith Post author

      Read the post. Under the law. ChexSystems is a consumer reporting agency, but these are reports on CHECKING ACCOUNTS. Nothing to do with borrowing.

      People can bounce checks through no fault of their own. I had a bank deposit a $4000 check as $400. I went into my credit lines. If I hadn’t had them, I would have been in trouble. And I demanded my records be corrected, and the bank staff said there was no reason to. I think they were thinking only of “normal” credit reports. not this type.

    2. Klassy!

      I was rejected for a savings account… for a bounced check that was falsely credited to me!
      I had to do all the legwork to get it cleared up.

      1. Klassy!

        So glad there are these measures to save ourselves from our profligate ways. You might not find them quite so useful if you are on the receiving end of them.

      2. Nathanael

        OK, rejected for a SAVINGS ACCOUNT?

        Apparently the bank you dealt with has gone completely insane. A savings account consists of you lending them money, and them giving you very little in return (custody and FDIC insurance, and that’s all).

        Traditional, competently run banks would let *anyone* open a *savings* account.

    3. Brooklin Bridge

      This is the same (good for thee but not for me) perverse reasoning used to give a wink and a nod to illegal foreclosure practices. So what that families are getting illegally thrown out onto the street; it’s at least clearing up the backlog (or warning the rabble not to take out risky loans)! This callousness to fairness, decency and human suffering will not solve any more problems than an open sewer system based on the reasoning that the effluent is at least going somewhere.

  4. W.C. Varones

    “having a bank account is a first step towards credit services, which in turn allow a consumer to build assets…”

    Excuse me? What percentage of consumers use credit services to build assets?

    Credit services allow a consumer to become a perpetual blood donor for the vampire banks.

    1. Ms G

      “Credit services allow a consumer to become a perpetual blood donor for the vampire banks.”

      Thank you. Same family of colorless poison as “Wealth Management Products” and 401(k)s.

      One of the better aphorisms to describe the phenomenon that I have seen – kudos!

  5. PQS

    On another note: In my state, we apparently have a law that consumers can only use payday advance loans 8 times in a year….I listened to the testimony of a lawmaker in favor of extending it out to 12 times a year, and his reasoning was that lots of people only get paid once a month, and with a middle class income, say $40K a year, getting a payday advance at a cost of $50 or $75 a month every month was a totally reasonable expense. I almost wrecked my car listening to that…..I make twice that, and if you told me I had to shell out that kind of money just to cash my paycheck, I would be burnt to the core. It’s outrageous how sold out our Leaders are to a financial services industry that, frankly, appears to be more vicious than either the Mafia or a drug gang. At least those guys provide either a product or service!

    1. diptherio

      I personally surveyed a number of payday loan customers while working for a consumer-advocacy non-profit. I can tell you with little hesitation that the number of payday loan customers making $40K a year is close to zero. The number of repeat customers with a middle-class income can only be expressed in imaginary units, so to speak.

      The argument I am used to hearing from payday lenders is that most customers don’t use the service every month, and so the high fees aren’t a big deal. This would be the typical response to me pointing out that they were charging fees that equated to 650% APR. So I’m a little amused to hear this advocate now making the opposite claim. It’s a sure sign of sophistry when they can’t keep their stories straight.

      1. PQS

        Bwahah! Imaginary units = priceless

        on so many levels!!

        Yeah, I cannot imagine a person making $40K a year thinking it was perfectly OK to fork over that kind of dough to some shady storefront payday loan place. The whole conversation was laughable.

  6. tyaresun

    These folks are morons, they are not necessarily evil. I had a credit card dispute in 2002 and have the pleasure of not receiving any new credit card offers in the last 10 years. My wife and daughter continue to receive credit card offers. Guess who brings in 70% of the income in the family?

    1. Nathanael

      Most credit card companies DO NOT WANT to lend money to people who have income or assets, or are otherwise able to pay back the credit card debts. They are trying to find targets for usury and debt slavery.

      I have had to go to great efforts to find a company which will happily supply a card for someone who pays it off each month, and who will treat me fairly.

  7. McWatt

    Yestereday I was scammed
    on the phone
    by the fax
    in the mail
    on line

    The people trying to
    steal from me
    Are my fellow citizens
    And Nigerians
    And the Chinee

    Today I am being scammed
    on the phone
    by the fax
    in the mail
    on line

    Where is my government?
    Trying to protect me?
    They’re too busy
    Propping up you see
    our banks
    who were previously
    trying to scam me

    Tomorrow I will probably be scammed
    on the phone
    by the fax
    in the mail
    on line

    Where will this cycle
    of scamming poor me
    lead in the end for our great country?
    You can let the world
    treat your citizens
    as marks
    but beware of the scammed
    carrying pitchforks

    “Catch-22 says they can do anything we can’t stop them from doing.”

    1. harry

      Nailed on straight.

      This country (US) is run by scammers who have country club memberships. They feel free to bombard you with phone calls looking for Hector Rodrigues or whoever has not paid their bills. Saturday morning 9am, guess who is calling.

      When you tell them that you know its not their fault but dont call me again, not in the morning not in the evening. Dont call me. They say “does that mean that Hector is not there?”.

      You wanna find him you spend your money, rather than waste my time with your robodialing ways. May the rse-pixies from the TSA take you and inspect you to death. Or second best may you spend time in the kind of jail that runs its own prison version of speed dating.

      I wish I could find the phone numbers of the pieces of the proverbial who own the companies that call. External costs on the many, for the benefit of the few.

      Stupid country. Run by the few, for the benefit of the few, at the expense of the many. No wonder they were so keen for everyone else to send their tired, their hungry, their huddled poor.

      So they could screw them too.

  8. diptherio

    I was shocked to read that the standard Paid NSF (overdraft protection) fee at banks was $30. My friendly neighborhood Credit Union offers overdraft protection ($200-$500) to all members for something like 5% APR. The few times I’ve had to use it, I’ve ended up paying a few pennies in interest. My CU’s overdraft system actually seems like a decent replacement for payday and title loan companies that many of my affluentially-challenged* brethren end up turning to in times of crisis (i.e. the end of every month).

    Once again, why the F is anyone still doing business with banks? CUs offer all of the benefits and almost none of the BS and exploitation. Maybe the next big consumer financial education push should just be getting people into credit unions and out of banks. My CU only requires $5 to open an account, so the barriers to entry, so to speak, are quite low.

    1. Klassy!

      Some credit unions are just marginally better than banks. My credit union has its share of BS. Sometimes it is good to support a small local bank that is important to a community.
      I don’t think it is always credit unions good/banks bad.

      1. diptherio

        Good point. Individual research is always required, though it does seem that on the whole, CUs tend to have lower fees and minimum balance requirements. And if you don’t like what you’re CU is up to, you can always show up at board meetings and/or run for the board yourself.

  9. F. Beard

    The US Government itself should provide a risk-free fiat storage and transaction service for all its citizens as a NORMAL duty of a monetary sovereign.

    1. F. Beard

      And of course, cancel its provision of deposit insurance to the inherently risky and systematically unstable “private” banking system.

      1. Nathanael

        You’re calling for a Post Office Bank. We used to have one in the US. The UK had one for decades. Canada had one. It’s a good thing.

    2. diptherio

      Here, here! Basic savings and checking services are necessary to function in society effectively and should be provided to all, just like primary education (and arguably more important).

      1. Laughing_Fascist

        Just an observation. Credit reports are designed to get simpletons like me with little debt to change their ways and borrow big from one of your friendly accommodative big five banks.

        The reasons your credit score is not higher than it is, said my credit report lyrically in a very helpful tone, is:

        “You either have no revolving accounts, or there is insufficient information about revolving accounts, in your credit file. People without revolving accounts or those who do not have sufficient information about revolving accounts are considered riskier by lenders.”

        “There is insufficient information about mortgage accounts.
        You either have no mortgage accounts, or there is insufficient information about mortgage accounts, in your credit file. People without mortgage accounts or those who do not have sufficient information about mortgage accounts are considered riskier by lenders. It is important to have various types of credit that are held in good standing in your credit file, including mortgage accounts.”

        “There is insufficient information about credit card accounts.
        You either have no credit card accounts, or there is insufficient information about these types of accounts, in your credit file. People without credit card accounts or those who do not have sufficient information about credit card accounts are considered riskier by lenders. It is important to have various types of credit that are held in good standing in your credit file, including credit card accounts.”

        I especially like the last one which could just as easily have said: “you mean you don’t have a 20% interest credit card balance? You are a freeloadin’ low life credit risk scum; you probly are the real life version of one of them characters in Deliverance. Loser a-hole.”

        1. LifelongLib

          You’re almost forced to have major credit just to do routine things like rent a car or hotel room, but I admire anyone who manages to function without it.

          1. Nathanael

            Hotels will usually take cash. Hotels are mostly run by small-time franchisees who aren’t going to turn down money.

            Car rental is practically impossible without a credit card. Car rental places are not usually franchises, they’re directly controlled by a large corporation.

        2. Ms G

          Hilarious, except hideous. I had exactly the same comments.

          It’s a category of “bad citizen” — person not drowning in debt (and therefore not chained to the Peter Pinguids). The practical consequences of avoiding debt — e.g., diminished credit scores — look trivial, but they are not. This is not unrelated to the ObamaFrankenCare mandate, impoverishing us with a mandate to buy a defective (harmful, actually) product at a large fraction of whatever earnings we have.

          The way things are going, pretty soon “not indebted person” will be added to some part of the NDAA, with all and any consequences.

      2. LifelongLib

        Dangerous thinking, F. Beard and diptherio. Where would we be if the government guaranteed everyone the basics to function in society? Oh yeah, way better off than we are now.

  10. Cameron Hoppe

    When I worked in deposit banking every customer was run through Chex systems. Generally, derogatory info didn’t stay for more than six months after resolution. If Chex is the reason for decline the customer is required by law to be informed of it in writing. Customers are also checked against numerous terrorism, money laundering, and sanctions watchlists. If the bank couldn’t explain the reason for an account decline it was almost certain to be because the applicant’s name had been flagged by Homeland Security.

    1. Nathanael

      “If the bank couldn’t explain the reason for an account decline it was almost certain to be because the applicant’s name had been flagged by Homeland Security.”

      That’s a Constitutional violation, but our corrupt and criminal courts obviously are not willing to do anything about it.

  11. jfleni

    Re: Chex systems
    Ask the bank if they use such a system, and if so (make them verify it!) Run do not Walk to the nearest credit union to open an account!

  12. Random Chance

    I suspect when it comes to debit accounts in the US, between income uncertainty, deposit clearing time uncertainty, and billing uncertainty, anyone who doesn’t have at least double their daily needs worth of liquidity at any given time runs the serious risk of overspending/underallocating funds SOMEWHERE within the financial chain at some point. I suspect credit cards were the usual mechanism for handling this, but between higher credit card costs and bad credit, it seems sorta inevitable that consumers are going to overdraw debit accounts. So the bank’s response is to make debit accounts more credit like. They get the fees, you get (less) of your money in a more timely fashion, and banks get to continue to erode the distinction between what you owe and what you own (which for many Americans is already pretty murky). So now we have stuff like ChexSystems, credit reporting for debit accounts with even less protections for the consumer than the credit reporting system… This is sad and so unnecessary. I remember when I was in New Zealand people would go out drinking on their debit card, spend on it until it was declined, then the night was over and they walked home. This to me seems a much better outcome then getting crushed by overdraft fees for a night on the town, never mind the danger of never being able to open another bank account until one’s overdraft issue has been resolved to the bank’s satisfaction.

  13. Brian

    Does anyone still believe that fraud and organized crime is not “the” model for all commerce? Tooth Fairy, Santa, Bunny? Or that diamonds are more valuable than sandpaper?
    If so, what will it take to turn your head and not look at it but with the corner of your eye? it is not SEP.

  14. Sandy Sanders

    My credit problems started in the early 70’s when I had a department store solicitation for a credit card “denied due to lack of credit history”. Back then one had to pay for a report unless denied. When I applied for a student loan in 1977 I was denied credit again because they confused me with my father. When I proved i was not my father 6 months later the loan came through. My loan in 1978 was denied because of a medical charge at work because an employer didn’t pay my bill at an emergency hospital. My credit reports never showed any problem. I had a friend who’s wife worked in a credit union run one of their reports for me to view which I could not copy because “she would loose her job”. It showed a long list of all of the above events plus some others which I never knew existed, all NOT on the credit report sent to me.

    The banks have a secret credit reporting system which contains everything ever attributed to you, expunged or not. This is totally illegal. Because of these reports I was unable to obtain any credit or credit cards, other than the two student loans which they had to give me due to the errors, until 1990. At that time I had paid off my ten years of the student loans and they still denied me credit stating “insufficient credit history”. I sent a letter to Senator Alan Cranston with cc to the bank and finally was given a credit card. I could then buy a house.

    These banks and credit agencies are incompetant terrorists. Meanwhile I had friends who had multiple bankruptcies and were able to get credit whenever they wanted. Be forwarned, thes entities do have secret access to your credit history YOU CANNOT SEE. You must attack them with the legally produced credit report and challenge their decisions based upon the contents of THIS REPORT ONLY. Any decision by them must be based upon this credit report. You CAN SUE THEM BLIND IF THEY TRY TO SCREW YOU. Don’t take it. Take them to court!

    1. Nathanael

      The totally illegal secret credit history needs to be stopped. But how to stop it, short of firebombing every bank executive’s house?

  15. KeninSD

    You can complain about all of this, or turn your back on it! I ignore my credit score, don’t ask for the reports, don’t use credit cards and bank at a credit union. And, I live pretty well, small maybe, but I have all I want and I have money in the bank.

    The only way those bastards have you is if you volunteer to live the way they want you to live, with credit cards, mortgages, auto loans, department store cards, etc., etc., ad nauseum. Until what they have in their poorly gathered and checked files is lies, half truths and Spanish Inquisition paper courts that tie you up in their imaginary world.

    I’ve noticed that they will always let you come back to borrow more. They need you more than you need them. So, use them until you can leave them and leave them behind.

    But, mostly learn to live without them and watch this false world come tumbling down. It deserves it.

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