What Is An Adverse Action Notice Letter?

If you applied for a credit card, personal loan, insurance, apartment lease, or a job and received an adverse action letter, you might be wondering what is an adverse action notice? We will explain what this notice is in more detail below.

What is An Adverse Action Notice Letter?

An adverse action notice is a letter that’s often sent to a person who applied for a credit card, personal loan, insurance, apartment lease, or a job and was denied based on information in his or her credit report. Adverse action letters typically explain the reason why the information in your credit report resulted in your denial or rejection.

Lenders, credit card issuers, employers, and insurance agencies are required by the Fair Credit Reporting Act to provide you with the reason why the information contained in your credit report resulted in the denial of your credit card, loan, insurance coverage, or job so that you can take actions to improve your credit rating to be approved in the future.

Federal law requires that you receive an adverse letter notice either orally, electronically, or via mail. You should expect to receive this letter within 10 business days of your denial.

When is an Adverse Action Letter Sent Out To You?

Here are some common reasons as to why you received an adverse action notice letter:

  1. Your credit score does not meet the lender’s minimum credit score requirements
  2. You do not have sufficient credit history
  3. You have negative information, such as missed payments, bankruptcy, or other items on your credit report
  4. Your debt to income ratio is too high
  5. You have submitted too many credit applications within a short period of time
  6. You have a collections account on your credit report
  7. You have too much existing credit with the lender

What Information Does An Adverse Action Notice Contain?

Typically, you will find the following information in an adverse action letter:

  1. Your credit score (only if it was used in the business decision)
  2. The date your credit score was generated
  3. Name, Address, and Phone number of the credit reporting bureau from which your credit score was obtained
  4. Reason(s) for the denial
  5. Notice informing you that you have the right to obtain a copy of your credit report
  6. Notice informing you of your right to dispute the accuracy or completeness of the information provided by the credit reporting bureau.

The purpose of an adverse action notice is to provide you with the reason for your denial so that you’re aware of the weaknesses in your credit score or credit report, allowing you to take action to improve your credit.

What Should You Do After Receiving An Adverse Action Letter?

As previously stated, adverse action letters explain why you were denied credit, so if you want to improve your credit, you will have a list of reason(s) to focus on to improve your credit so that you’re approved in the future.

If you were denied because your credit score does not meet the lender’s minimum requirements, if you want to be approved in the future, you should take steps to improve your credit score. For example, you can improve your credit score by making your payments on time, reducing the balances on your accounts, refraining from applying for too many credit cards or loans, and keeping old accounts open. All of these should assist you with improving your credit score.

If you were denied because you do not have sufficient credit history, you can get past this obstacle by paying your open accounts on time. If you do not have any accounts open, you should explore the option of applying for a secured credit card. Secured credit cards are a great way for someone who has little to no credit to build credit from scratch or improve bad credit in order to avoid denied for short credit credit history.

If you were denied because you’re utilizing too much of your available credit, you can remedy this problem by paying down your accounts. Your credit utilization (how much of your available credit you’re using) accounts for 30% of your credit score, so to improve your credit and avoid being denied for using too much of your available credit, you should pay down your account balances.

If you were denied because your debt to income ratio (DTI) is too high, you can avoid being rejected for this reason in the future by paying down the debts that you have or by increasing your income. Typically, persons who are rejected for this reason can address high DTI by paying down credit card balances and other loan balances.

If you were rejected because you have a collection account on your credit report, the only way to remedy this situation is to wait for the collection account to be removed from your credit report. Collection accounts will remain on your credit report for 7 years from the date you first became delinquent on your account that was sent to collections. After the 7 year period, the collection account will automatically be removed from your credit report. That said, the impact that a collection account has on your ability to obtain credit lessens as the collection account ages. The more recent your collection account, the more difficult it will be to obtain credit.

Filing a Dispute to Remove Inaccurate Information From Your Credit Report to Avoid Receiving an Adverse Action Letter

Also, if you received an adverse action letter that’s based on incorrect or inaccurate information on your credit report, you may be able to remove the inaccurate or incorrect information from your credit report by filing a dispute with the credit reporting bureau displaying the information to have it permanently removed from your credit report.

When file a dispute to have an item removed from your credit report, the credit reporting agencies have 30 days during which to perform an investigation to determine whether the information is accurate. If the investigation reveals that the information is indeed inaccurate, the credit reporting bureaus will remove it from your credit report. However, if the investigation reveals that the information is accurate, it will remain on your credit report.

So, you should only dispute information that you reasonably believe is inaccurate because if the information is accurate, it will likely not be removed from your credit report.

How Can You Improve Your Credit To Avoid Adverse Action Notices in the Future?

  1. Payments – The number one thing that you can do to improve your credit score is to make all of your credit card and loan payments on time. Your payment history accounts for 35% of your credit score, so making your payments on time will help your credit score. Missing even a single payment can cause a significant drop in your credit score, especially if you have a high credit score, so make all of your payments on time to improve or maintain your credit score.

  2. Account Balances – The second biggest factor that impacts your credit score is your credit utilization. Credit utilization refers to how much of your available credit you’re using. Your credit utilization accounts for 30% of your credit score. Typically, the lower your credit utilization, the better of an impact it will have on your credit score. So, to improve your credit, pay off some of the balances on your credit cards and loans.

  3. Avoid Applying For New Credit – To improve your credit score, you should avoid applying for too many new credit cards, loans, and other credit items. This is so because each time you apply a hard inquiry is added to your credit report, slightly lowering your credit score. A single hard inquiry can lower your credit score by a few points, but accumulating too many hard inquiries within a short period of time can significantly lower your credit score. So, only apply for credit cards and loans that you need for the best impact on your credit score.

  4. Keep Old Accounts Open – Your account age accounts for 10% of your credit score. So, having old accounts that are in good standing helps your credit score. So, if you have an old account that’s in good standing but you barely use it, you’re better off keeping it open for the best impact on your credit score.

  5. Review Your Credit Report – If you’re not already in the habit of checking your credit score, you should periodically check your credit score to ensure that nothing negative is impacting your credit score. If there is something negative impacting your credit score, you will find it on your credit report, allowing you to take action to remedy the negative items. Checking your credit score allows

Applying For New Credit After Being Denied or Rejected

If you have applied for a credit card or loan and you’ve been denied or rejected, you should not immediately re-apply for the same credit card or loan. In fact, you should take the time to review your credit report, and address any weakness you have. For example, if you do not have sufficient credit history, you should wait until you’ve built your credit to re-apply. If you re-apply immediately after being rejected, chances are that you will be denied again.