Many of us have had that sinking feeling that comes with realizing there’s just not enough money in your bank account to cover a purchase, or received a notification saying as much. It’s no fun, but it happens to plenty of people. Now imagine that even just one of those overdrafts could prevent you from getting a bank account in the future.

That’s the case for more than a million low-income Americans, says a new report from the New York Times, all because of private databases many major banks use to check on potential customers’ histories when it comes to their financial doings in the past.

The databases include information on past errors or mishaps related to banking products, like overdraft fees or bouncing checks, which is apparently supposed to help those banks weed out risky customers. It started back about 20 years ago when banks were trying to stem the tide of serial bad consumers writing bogus checks, but now consumer advocates say it’s affecting mostly low-income people who live paycheck to paycheck and are often more likely to make minor mishaps.

Those consumer advocates and other authorities say this process of denying bank accounts based on such minor issues is swelling the ranks of the 10 million households who don’t have a bank account, something that prompts many to turn to payday lenders and other less than ideal financial situations.

“Hundreds of thousands of Americans are being shut out for relatively small mistakes,” said Jonathan Mintz, the commissioner of the New York City Department of Consumer Affairs.

For example, one Brooklyn resident tells the NYT she was denied a bank account at a credit union — depite the fact that she was paid up on her bills and had a job — because of a $40 fee she incurred over two years ago. She repaid the amount, but that didn’t seem to matter, she said. She has been prevented from opening an account at almost every bank she’s tried, she explains, something that’s “insulting and frustrating.”

Federal regulators are now looking into these database companies because it isn’t so easy to remove inaccurate information once it’s in there or get copies of the report, which must be possible under federal law.

The Consumer Financial Protection Bureau is on the case after reading complaints and is looking into whether or not the database companies comply with the Fair Credit Reporting Act, because banks must provide a reason for rejecting an applicant.

Often, the report says, the databases don’t give may details about the reason behind the bad mark, saving the specifics for its clients about how much of the debt is principal compared to how much of it is made up of fees accrued.

Some of the banks who use the databases say they carefully review other information as well to try and separate the people who have made small mistakes and those who are actual fraudsters. It all comes down to what the banks decide, however.

“We have had too many experiences where even banks that have offered to be flexible with us find their own internal risk management systems mean that their hands are tied,” said the New York’s commissioner of consumer affairs.

Consumerist reader Logan points out that consumers can request their reports from databases like ChexSystems and TeleCheck in order to dispute any claims. Click the bolded links to find yours.

Over a Million Are Denied Bank Accounts for Past Errors [New York Times]

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