What Are Second-Chance Bank Accounts and How Do They Work?
Most people have heard of the major credit reporting bureaus: Experian, Equifax, and TransUnion. These companies track and monitor consumers’ use of credit cards, loans, and other forms of borrowed capital. Those who pay off their debts on time and in full get good scores, while those who fall behind or default get dinged.
However, not as many people realize there are similar agencies for banking services. Among other things, these organizations track bounced checks, account overdrafts, and failure to resolve overdraft charges. People who commit multiple such missteps build up negative profiles.
Financial institutions then may deny their applications to open new accounts. So, they may be forced to consider alternatives to standard banking or go with no bank account at all.
Second-chance bank accounts offer a lifeline. They’re a valuable way to rebuild a positive track record and reestablish eligibility for regular banking services. But how do they work? Keep reading in order to learn the ins and outs of second-chance bank accounts.
How Do Second-Chance Bank Accounts Work?
Second-chance bank accounts function much like regular checking accounts. As an account holder, you have access to most standard banking services. Included services vary but may include access to a debit card, direct deposits, ATM transactions, and electronic fund transfers.
Some financial institutions offer a full suite of services to second-chance account holders. But others offer a narrower, more limited set of functions and features. From the institution’s perspective, reducing the account’s functionality limits the possibility of misuse and mitigates risk. Fortunately, it should be clear which features an account supports before you decide to move forward.
Additionally, second-chance bank accounts often carry more rigid terms and conditions. These may include:
- Minimum initial deposit requirements
- Monthly account fees
- Surcharges on ATM transactions that exceed a specified monthly maximum
- Daily, weekly, or monthly spending and/or withdrawal limits
It’s also worth noting that some providers build in mechanisms that allow second-chance account holders to upgrade to regular checking or savings accounts. In such cases, eligibility usually kicks in once you’ve used the account without any issues for a certain length of time. Some providers even automatically convert second-chance accounts to standard accounts if you go problem-free.
Should You Open a Second-Chance Bank Account?
If a less-than-perfect track record is inhibiting your ability to do regular banking, then a second-chance bank account is absolutely worth considering.
With increasing amounts of financial activity going digital, not having a bank account makes everyday tasks challenging or impossible. For instance, simple things like cashing a paycheck become far more complicated.
You may be forced to use check-cashing services from payday lenders, which can eat 2% to 8% of your earnings or more. Carrying cash isn’t always secure, and you may be tempted to spend it. Since living paycheck to paycheck makes it much harder to get ahead financially, your risk of becoming trapped in an unhealthy financial cycle increases.
According to the Federal Reserve Bank of San Francisco, just 26% of consumer transactions used cash in 2019. Not having access to alternate methods of payment makes life needlessly difficult.
For people faced with the inability to use traditional banking services, a second-chance account may be a viable solution.
Pros and Cons of Second-Chance Accounts
- Access to vital banking services: With a second-chance bank account, you can earn your way back onto the proverbial grid. You won’t need to conduct all your transactions in cash or risk spending cash you didn’t mean to. Additionally, you won’t need to rely on check-cashing services.
- You can repair a less-than-perfect banking record: Second-chance bank accounts give consumers the opportunity to turn the page on their checkered financial past. If you use yours responsibly, then you may qualify for regular bank accounts again.
- Manage your finances with greater ease: Having a checking account makes life much easier. You can send and receive money electronically and cover bills and expenses instantly. All in all, you can navigate your financial responsibilities with far greater efficiency.
- Options may be limited: Not all traditional or online banks offer second-chance accounts. So, consumers have less leeway and choice when it comes to shopping around.
- Fees tend to be higher: Many second-chance bank accounts carry monthly fees, which are often relatively high. Second-chance accounts are usually cheaper than relying on check-cashing services, but they can still eat into your savings. In theory, this provides an incentive to use the account as intended and earn your way back into good standing as quickly as possible.
Since the structure of second-chance bank accounts forces disciplined use, they have added value as a self-educational financial tool.
What Should You Do If You Open a Second-Chance Account?
For the best chances of success, experts often recommend a few proactive steps before or upon opening your second-chance account:
- Improve your financial literacy and educate yourself on healthy approaches to money management
- Opt-in for alerts and notifications that let you know if you approach monthly transaction or withdrawal limits
The Bottom Line
Second-chance bank accounts often come with higher fees and stricter limits, but they’re still far preferable to not having a bank account at all. With responsible use, they can help consumers repair uneven financial histories. And of course, they offer many practical advantages and cost savings compared to life without a bank account.