How Do Second Chance Banking Accounts Work?

Everyone deserves a second chance in life, and that goes for people who have had a rocky banking history. If your financial history needs a fresh start – perhaps you got into a habit of writing bad checks or hitting your overdraft protection and not paying it back – second chance banking may be for you.

What Is Second Chance Banking?

Not having a bank account can be a hardship; after all, carrying around cash is unsafe, and you want to have a checking account to pay your bills and accept deposits. But if you have a poor financial history, you might need an opportunity like second chance banking, which is designed for those who have been previously rejected by other financial institutions.

You may have had previous bank accounts shut down because of unpaid overdrafts, bounced checks, or other banking transgressions that will flag you in the national banking systems like ChexSystems, Early Warning Systems, or Telecheck reports. According to the National Consumer Law Center, more than 80% of banks use one of these systems to double-check people who are trying to open a new account – and your history can follow you for up to 5 years. That means you can’t outrun the fact that you’ve mishandled your bank account in the past.

By contrast, second chance banking accounts look past those notices and allow you to work to rebuild your banking history.

Advantages

The main advantage is that now you have a secure place to bank, even if you had former banking troubles. But that doesn’t mean you’re being treated like a second-class citizen; in fact, many second chance bank accounts have a variety of benefits that any bank account would offer. These include easy account monitoring and online banking, often through a mobile app, and other features like direct deposit and even scheduled bill paying so you never miss another payment. And most second chance banking accounts are FDIC-insured, which means your money is protected. (Just make sure you double-check when opening your account.)

But the benefits go past the perks and programs. What these types of accounts really offer is an opportunity to rebuild your history by cleaning up any negative reports and eventually allowing you the chance to move back to a regular bank account. In fact, many banks that offer second chance accounts allow you to transfer to a traditional account after a certain number of months of positive banking history. They value you as a client and show it with an upgrade.

Disadvantages

While many accounts offer traditional banking services, like mobile banking and direct deposit, others might have fewer frills, such as no ATMs or branches you can visit. They also might have more requirements for minimum deposits you must keep in your account and limits on how many transactions you can conduct each week or month.

And, you may not be surprised to learn that few will offer overdraft protection, which means you must be extra vigilant about only spending money that you know is in your account, a smart habit to get into anyway.

Who Might Need A Second Chance Bank Account

If you’ve ever had a bank account closed, then second chance banking might be for you. That’s because other financial institutions are unlikely to allow you to open an account with them based on past experiences. In that case, the systems mentioned above might be flagging your name and blocking your ability to open a traditional account.

Some people with poor credit history also struggle to find a bank that will take them as a customer, so a second chance banking account gives you the opportunity to rebuild your banking history and get back on solid footing.

How To Open An Account

Opening a second chance bank account is as straightforward as opening a traditional one. Wondering how to apply for a bank account and the steps you should take? It’s easy, but we will walk you through the basics.

First, look through your various options to find the bank and account that’s right for you. (If you don’t have a local institution that offers second chance banking, a few national choices are listed at the end of the article.)

You’ll want to review the features they offer and any charges or fees. Then you’ll fill out the paperwork, including scanning your identification and providing a physical address along with other verification, such as a bill or other piece of mail that has your address. You may need to make an initial deposit, so check that you have sufficient funds to do so. Your bank’s online portal will walk you through all the steps.

Choosing The Right One

If a second chance bank account is right for you, make sure that you don’t waste time visiting a bank that doesn’t offer them. There are plenty of choices both in your community – probably at a smaller, local institution – and nationwide, with many choices offered online.

Before opening your account, verify the fees the bank will charge and the services they offer and make sure they work for you. Here is additional detail on how to assess and compare second chance bank accounts.

Review Their Fees

Many accounts require a fee, either monthly or annually. As you are comparing your options, try to find a no- or low-cost second chance banking account to preserve your money. But before you just jump at the lowest fee, remember to compare the available features to ensure you have everything you personally need in a bank.

You also want to find out how much money you need to have in the account when you open it, and if there is any requirement that you maintain a certain amount at all times, called a minimum deposit.

Ask About The Features They Offer

While not all banks offer all services, there might be some you don’t even need and would never miss. For example, some people want to have a variety of ATMs to choose from, while others conduct all their business online or through peer-to-peer apps like Venmo and are more interested in mobile deposit, online bill pay, and other financial technology features.

It’s also smart to ask if the bank offers a policy to upgrade you to a traditional account after a certain amount of good banking behavior. Knowing there’s a plan in place to join a regular bank can be a powerful motivator to keep your financial habits tidy.

What Are Their Restrictions?

When you sign up for a second chance banking account, you might have to accept that it has fewer bells and whistles than other accounts, which, again, might be perfectly fine depending on your banking habits.

Some of the limits you should check for are how many transactions you can do in a given week or month, both spending via debit card or check, as well as withdrawals. These might be too punishing if you intended to be a heavy bank user. For most people, having access to a minimal amount is perfectly adequate, while others might need more leeway to do more money transferring.

Another common restriction from second chance banking is the ability to write checks. Again, that might not be an issue if you never write checks, or it could be a feature that you really miss. Just make sure to understand the options before opening the account.

What Banks Offer Second Chance Checking Accounts?

Most major financial institutions don’t offer this service, although you can check around if you have a convenient bank you’d prefer to use. And you may be able to find a local option from a smaller community bank or a credit union. If you come up short locally, there are also online banks that offer second chance banking nationwide. Here are four that are particularly highly rated.

Chime Second Chance Banking

Monthly fee: $0

Initial deposit: $0

Chime offers a host of great benefits in its second chance checking account, and they are free, with no monthly fees and no minimum balances. Chime helps you develop a habit of savings by rounding up every purchase you make with the debit card to the nearest dollar which they put in your savings account. They don’t charge overdraft fees, among other perks.

Peoples Bank Cash Solutions Second Chance Checking

Monthly fee: $4.95

Initial deposit: $30

Peoples Bank offers you all the benefits of most banking accounts, including a debit card, checkbook and access to ATMs, online bill pay, online banking features, and online money transfers.

Radius [now Lending Club] Essential Checking

Monthly fee: $9

Initial deposit: $10 

Another solid option that provides mobile money management within the app, direct deposit, and scheduled monthly payments so you never miss one. After 12 months of clean banking history, they may offer you the chance to upgrade to a Rewards Checking Account.  

Varo

Monthly fee: $0

Initial deposit: $0

Varo offers a debit card, free paper checks, and access to more than 55,000 ATMs. Like Chime, it will round up your purchases and put the difference in your savings account, which helps you build that habit. Another great feature is setting aside some of your direct deposit check into savings before you ever even see it.

Final Thoughts

Being denied a bank account because of a poor banking history can be frustrating, especially if you are committed to turning it around. That’s where a second chance banking account comes in to give you the opportunity to rebuild your credit history – and often take those good behaviors to a traditional account as soon as you’ve proven your abilities.

Want to know about financial wellness? Check out more personal finance advice on the Rocket HQ^SM blog.