- Creditors send adverse action letters when they reject your credit application.
- Adverse action notices include the reason for rejection and which credit bureau supplied the credit report.
- An unexpected adverse action may indicate inaccurate information on your credit report, which you can dispute.
If you've been denied credit, you're not alone. According to recent data released by the Federal Reserve Bank of New York, 21.1% of people who applied for credit were rejected over the past year.
When creditors deny your application, they can't leave you in the dark about their decision. Federal law requires creditors to provide a detailed disclosure, also known as an adverse action letter. Learn more about what adverse action letters include and what steps to take if you receive one in the mail.
Understanding an adverse action letter
What is an adverse action letter?
An adverse action letter is a document explaining why a creditor has denied your application for financing based on your credit history. This letter is required under the Fair Credit Reporting Act (FCRA) when a creditor uses your consumer report to make credit decisions. Adverse action letters are typically delivered by mail within seven to 10 business days after your denial.
As defined by the Equal Credit Opportunity Act (ECOA) and the Fair Credit Reporting Act (FCRA), adverse actions can include:
- Rejection of credit application
- Refusal to grant credit in the requested amount or terms
- A negative change to account terms after an unfavorable review of a consumer's account
Legal requirements of an adverse action letter
The Fair Credit Report Act requires creditors to include the following information in an adverse action letter, irrespective of whether the letter is delivered verbally, in writing, or electronically:
- The name, address, and phone number of the credit reporting agency that supplied the report used to determine the adverse action
- Reason(s) for the denial
- A statement explaining that the credit reporting agency did not make the adverse decision and will not explain why the decision was made
- A notice of the consumer's right to a free copy of their report from the credit reporting agency if they request it within 60 days
- A notice of the consumer's right to dispute the accuracy of the information provided by the credit reporting agency
- The consumer's credit score, if it was used to make the decision
Why you might receive an adverse action letter
A creditor can deny your credit application for a multitude of reasons, but some of the most common ones include:
- A credit score that doesn't meet the creditor's minimum requirement
- Poor debt-to-income ratio
- Little to no credit history
- Multiple delinquent payments
- Multiple recent hard inquiries
- High credit utilization ratio
- Too much existing debt with the same lender
- A bankruptcy
How to respond to an adverse action letter
You don't need to respond to an adverse action letter since it's simply a document stating that you've been denied credit. But, if you disagree with the decision and would like to dispute it, you can contact the credit reporting agency that provided the information.
Here's a quick breakdown of what you can do after receiving an adverse action letter:
Assess the situation
Until you fully understand why you've been denied credit, you could end up getting rejected again if you submit another application. So, before doing anything else, read the adverse action notice to assess your credit situation. Regardless of how the creditor provides the notice, they must list the reasons for the adverse action.
Check your credit report
The adverse action letter only gives you a general idea of why you've been denied credit. To see the full picture and know where you stand in terms of your credit health, you can request a free copy of your credit report from the same bureau your creditor used.
You can request a free credit report from all three major credit bureaus once per week. The adverse action letter will also provide the contact information for the credit reporting agency that provided your credit file.
File a dispute
Once you receive a copy of your free credit report, thoroughly review it to check for any inaccuracies that might be responsible for the adverse action. You can typically file a dispute with the credit reporting agency online, by phone, or by mail to correct the information.
You can also employ one of the best credit repair companies to submit credit disputes to the credit bureaus on your behalf.
Take steps to improve your creditworthiness
If your credit application was rejected for a valid reason, take steps to improve your credit score before submitting another application. You can work on your credit situation by paying bills on time, lowering your credit utilization ratio, paying down debt, and avoiding unnecessary credit applications. Looking into some of the best credit builder loans may also be worth your time.
If you have information on your credit report lowering your credit score, like a delinquency or several hard inquiries, you may have to wait for those to age on your credit report.
Another often overlooked method to improve credit is a goodwill adjustment, which involves reaching out to creditors and requesting the removal of a negative mark due to a one-time oversight or hardship. "While not guaranteed, many creditors may consider goodwill adjustments, especially if you have a generally positive payment history," said John Browning, a financial advisor and founder of Guardian Rock Wealth.
Contest a rejection
The credit card provider that rejected you may have a process for contesting your rejection. This works best if you have additional information to add to your application, such as an unmentioned source of income.
If you believe your credit application was denied because of reasons beyond your financial information, such as your race, gender identity, or nationality, you may also report credit discrimination to the Consumer Financial Protection Bureau or FTC.
Adverse action letters in employment
Adverse action, in the context of employment, is anything that could negatively affect your employment situation but is typically used during the hiring process. If an employer decides to take an adverse action against you, federal law requires that they give you an adverse action notice, either by mail, electronically, or verbally, to inform you that you will not be hired due to the negative findings in your background check.
Here's an example of what adverse action may look like in employment: MetaApple Inc. informs its candidate, Jessica, that she won't be hired as a software engineer after a background check reveals she's been charged with drug-related felonies and is behind on multiple credit card payments.
How to avoid adverse action letters in the future
Monitor your credit report
You can avoid adverse action letters by monitoring your credit report on a regular basis. It is important to know what is on your credit report before you apply for credit, employment, or an apartment.
Address negative items proactively
If there are negative items on your credit report you can work to either have them removed if they are inaccurate or build positive payment history in the future.
Frequently asked questions about adverse action letters
Yes, you can dispute an adverse action letter. There may even be a process for contesting it. This will work best if you have information to add to your application, like additional income.
Common reasons for receiving an adverse action letter are a high debt-to-income ratio, a credit score that doesn't meet the creditor's minimum requirement, too many hard inquiries, and multiple late payments or accounts in collections.
No, an adverse action letter will not affect your credit score or appear on your credit report. However, if the creditor pulled a hard inquiry when determining your eligibility for a credit application, your score could temporarily drop by a few points.
The consumer typically has 60 days from the date of an adverse action letter to respond and obtain more details about the negative information so that if it is inaccurate, the consumer can correct it.
