When you apply for a loan or attempt to open a deposit account at a bank, the banker helping you may check your credit report. Many banks refuse to open new accounts for people with low credit scores and there are no federal or state laws that prevent banks from doing so.
Loans
Lenders use the "Four C's of Credit," when underwriting loans or credit products. The Four C's are: capacity, capital, collateral and character. You must have the capacity to repay the loan that means sufficient income to cover the debt. You must have capital or cash for a down payment, suitable collateral (such as a home) and good character. Banks determine character by looking at your credit report to see if you have a good record of paying your debts. If you have a low credit score, the bank can decline the loan application.
Deposit Accounts
When you open any kind of deposit account at a bank, you are effectively lending money to the bank. However, if you overdraw your account, you become a debtor as the bank lends you money to cover the debt. Banks view people with low credit scores as more likely to overdraw their accounts than people with good scores. Additionally, if you have ever had a bank account charged off at another institution, that debt may appear on your credit report and further discourage any bank from allowing you to open a new account.
Other Reports
Some banks do not check your credit score when you attempt to open a new account. However, banks that do not check credit usually get consumer reports from ChexSystems. The reports from ChexSystems do not contain information on your past credit history but do contain information pertaining to your past deposit account history. ChexSystems reports are not the same as credit reports but are classified as consumer reports under the Fair Credit Reporting Act. A bank can decline you for an account due to a debt that shows up on a ChexSystems report even if it did not impact your actual credit score.
Other Considerations
Many banks refuse to open checking accounts for people with low credit scores but do allow them to open other kinds of accounts such as savings accounts. Banks perceive savings accounts as less risky because account holders have more limited access to these accounts and they typically don't come with debit cards nor check-writing privileges. Each bank can set its own standards for opening accounts but the bank must apply the same criteria to all customers and not discriminate against certain individuals or groups of people.
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