What Is an Adverse Action Letter?

Quick Answer

An adverse action letter is a document that details the reasons why a lender denied a recent credit application. Lenders are required by law to provide this notice, which also includes details about your rights as a consumer.

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An adverse action letter is a notice that you've been denied credit, employment or even an insurance policy. This notice provides you with information about why you were denied and some helpful resources, both of which can help you determine your next steps.

What Is an Adverse Action Letter?

When a lender, insurance agency, employer or other type of organization denies you credit, employment or other services due to information found in your credit report, they're required by the Fair Credit Reporting Act and the Equal Credit Opportunity Act to tell you why.

According to federal law, an adverse action notice can be made orally, electronically or in writing. In many cases, you can expect to receive a letter in the mail within seven to 10 business days of the denial.

What Is Included in an Adverse Action Letter?

Regardless of how the company provides the notice, it's required to include the following information:

  • Your credit score, if it was used to make the decision, along with the date the score was created and the range of possible credit scores based on the model used to generate your score.
  • The name, address and phone number of the credit reporting agency (Experian, TransUnion or Equifax) that supplied the credit report used in the decision.
  • Reasons for the denial (there can be up to five).
  • Notice of your right to a free copy of your credit report within 60 days of the credit bureau, and how to get that copy.
  • Notice of your right to dispute the accuracy or completeness of any information provided by the credit reporting agency.

With this information, you'll have an understanding of not only where your credit history stands, but also which areas of your credit file need to be addressed.

Why Did I Receive an Adverse Action Notice?

There are several reasons why you may be denied credit, employment or other services. However, you'll only receive an adverse action notice if the denial was due, at least in part, to information on your credit reports.

Potential reasons include:

  • Credit score doesn't meet the creditor's minimum requirement
  • Too much debt relative to your income
  • Not enough credit history
  • Late payments
  • Too many recent credit applications
  • High credit utilization ratio
  • Too much existing credit with the lender
  • Bankruptcy, short sale or foreclosure
  • Charge-off or collection accounts

Companies are required to list four of the key factors that are adversely affecting your credit score. If one of the key factors is the number of hard inquiries on your credit report (indicating applications for new credit), then they must include five factors.

How to Respond to an Adverse Action Letter

You don't necessarily need to respond to an adverse action letter, but if you believe that your situation deserves context, you can reach out to the company that provided the letter and speak with a customer service representative.

For example, if you find debt or derogatory marks you don't recognize, you can explain the situation and make it clear that you plan to exercise your right to dispute the information with the credit bureaus. Alternatively, if you applied for a mortgage loan, you may be able to pay down some debts and request a rapid rescore.

Next Steps After Receiving an Adverse Action Notice

Whether or not you ask the company that sent you the letter to reconsider, here are some steps you can take to get a handle on your credit situation and improve your odds of getting approved the next time.

1. Review the Reasons for Denial

With so many different potential reasons, understanding why you were denied can make it easier to know what your next steps should be.

For example, if it's because of a high credit utilization rate, work on paying down high credit card balances. If you have too many recent credit inquiries, you may need to wait at least a few months before applying for credit again.

2. Understand Which Factors Affect Your Credit Score

The primary factors that influence your FICO® Score include:

  • Payment history
  • Amounts owed
  • Length of credit history
  • Credit mix
  • New credit

Check your FICO® Score to see where you stand currently, and consider whether there are other areas you can improve within those broader categories.

3. Review Your Credit Report

While your credit score offers a quick snapshot of your overall credit health, your credit reports provide the source data for your score and can give you more specific information about areas where you can improve.

Start by getting a free copy of your Experian credit report, then visit AnnualCreditReport.com to get a free copy of your TransUnion and Equifax credit reports. As you review your reports, look for anything that could be hurting your credit score, then make a plan to address it.

4. Dispute Inaccurate Information

As you review your credit score and report, also look for information that's potentially inaccurate or even fraudulent. If you find something, you have the right to file a dispute directly with the credit reporting agencies online, by phone or by mail.

Once you've submitted your dispute, the credit bureau will work to resolve the issue, including gathering information from the creditor that furnished the information. Once the investigation is complete, which typically occurs within 30 days, one of three things can happen:

  • The inaccurate information will be corrected.
  • The inaccurate or fraudulent information will be updated or removed.
  • The information will be verified as accurate and stay on your report.

5. Wait to Apply Again

While it may be tempting to apply again quickly, it can take some time for your efforts to reflect in your credit reports and credit score. Continue to monitor your credit to understand when the time is right to submit another application.

How to Improve Your Credit

Depending on what you find in your adverse action letter, prioritize steps to address specific reasons for denial. There are also other actions you can take to build your credit score, including:

  • Pay your bills on time. If you're behind on any of your payments, work on getting current as quickly as possible. Then, make it a goal to pay on time every month going forward. While you can't erase the negative influence of past-due payments, a positive payment history going forward can help reduce the sting.
  • Pay down credit cards. How much you owe is an important factor in your credit score, especially when it comes to credit cards. Some experts recommend keeping your card balances below 30% of your available credit, but the lower, the better.
  • Avoid unnecessary credit applications. Credit inquiries don't have a significant impact on your credit score on their own, but if you apply for credit multiple times in a short period, it can have a compounding effect (unless you are rate shopping for an installment loan such as a car or home loan). So try to avoid applying for credit unless you absolutely need it.
  • Get credit for other payments. If you make other payments, such as rent, utilities, phone, insurance and streaming services, Experian Boost®ø could potentially improve your credit score by adding that information to your Experian credit file.
  • Get added as an authorized user. If you have a family member with good credit, consider asking them to add you as an authorized user on their credit card account. The full history of the account will be added to your credit reports and could help improve your score.

Consider Other Options in the Meantime

While it's important to work on improving your credit, that doesn't necessarily mean you can't get approved for credit in the meantime—and if your financial situation is urgent, you may not have the luxury of waiting.

There are some lenders that specialize in working with people who have less-than-stellar credit. While their interest rates and other features may not be as favorable as prime lenders, they may still be able to get you the credit you need. Consider these options only if you absolutely need credit now and can't wait to work on your credit situation.