Adverse action notice: What it is + next steps

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Since lending money via a loan or credit card is risky by nature, creditors frequently assess the risk profile of borrowers to ensure they meet their lending criteria. If you submit a credit application and don’t get approved, the creditor must tell you why in the form of an adverse action notice. While you may want to toss it out, the adverse action letter can provide you with valuable insight into how to move forward.

Read on to learn what adverse action notices include and the next steps you can take after receiving one.

Table of contents:

• What is an adverse action notice?
• What does an adverse action notice include?
• Types of adverse actions
• Does adverse action affect your credit score?
• Next steps

What is an adverse action notice?

An adverse action notice is a correspondence detailing why a lender denied your credit application or made any other unfavorable decision. These negative decisions are known as adverse actions, and they’re usually made after reviewing a consumer’s credit report or if the creditor’s policies have changed.

The lender must send an adverse action notice within 30 days of receiving the credit application. According to the Federal Trade Commission (FTC), an adverse action notice can be oral, written or electronic.

Adverse action notices are required by the following federal laws to ensure that consumers maintain their rights and that credit issuers disclose all relevant information:

• The Fair Credit Reporting Act requires lenders to send an adverse action notice to consumers if the decision is credit-based.
• The Equal Credit Opportunity Act requires lenders to explain—to both consumers and businesses—why they made an adverse action.

What does an adverse action notice include?

An adverse action letter must include the following information:

• A detailed explanation of the reasons for the adverse action
• Information identifying regarding the credit bureau that provided the report, including its name, address and phone number
• Confirmation that the credit bureau was not responsible for the decision and, therefore, cannot provide a reason for it
• A statement of the consumer’s right to dispute the accuracy
• A notice of the consumer’s right to request a free credit report copy within 60 days
• The consumer’s credit score, if it was a factor in the decision

Types of adverse actions

If you’ve recently received an adverse action notice, you may be wondering why. The most common adverse actions include credit denial, credit limit reduction, interest rate increases and account suspensions or closures.

1. Credit denial

Perhaps the most common type of adverse action, credit denial, occurs when a lender reviews your credit report and deems you ineligible or otherwise unfit for a line of credit. Typically, denial occurs for the following reasons:

• Inability to verify income
• Incomplete application
• Limited or no credit history
• Presence of derogatory marks such as late payments, bankruptcy or repossession
• Too low of a credit score
• Too high of a debt-to-income ratio

Another form of credit denial is “adverse approval,” which occurs when you deny a counteroffer made by a creditor. For example, if you apply for a credit card with a 10 percent interest rate and no annual fee, the creditor may review your credit report and offer you modified terms of a 15 percent interest rate and a $100 annual fee. If you reject these terms, you will receive an adverse action notice.

How to avoid this type of adverse action: Overall, good credit health is necessary to get approved for a new line of credit. Before applying, make sure you can verify your income and work to pay down your debt if your debt-to-income ratio is over 36 percent.

2. Credit limit reduction or denial of credit increase

Credit limits gauge how comfortable a lender feels lending you money. If a lender decides you’re a risky borrower, they may decide to lower your credit limit. If you receive an adverse action notice due to a credit limit reduction, make sure to check what your new limit is. Then, work to pay down your balance to keep your credit utilization rate under 30 percent.

You may also receive an adverse action notice after requesting a higher limit on a credit card. If a creditor denies your request or provides a counteroffer, it may be because:

• Your account is too new
• You consistently hold too high of a balance
• You haven’t made on-time payments
• You’ve opened too many new credit accounts recently

How to avoid this type of adverse action: To prove to lenders that you’re a responsible buyer, avoid carrying a high balance month over month, make on-time payments and limit the number of new accounts you open within a short time frame.

3. Interest rate increase

If a credit issuer raises your APR, they have to provide 45 days of notice before taking action. It’s important to note that there are two instances where your interest rate may increase, but you will not receive an adverse action notice:

• If a 0 percent introductory period ends and your APR increases to the normal rate
• If the federal prime rate—which is what variable APRs are based on—goes up

How to avoid this type of adverse action: The best way to avoid paying any interest at all is to pay off your balance in full every month. To avoid an increase in interest rate, maintain responsible credit management habits.

4. Account suspension or closure

A credit account suspension means that your ability to make new purchases on the card is revoked, but the account is still operational and you’ll need to continue to make on-time payments. This usually happens if:

• The account is delinquent
• A credit limit reduction has caused your balance to exceed the new limit
• The creditor has any other reason to view you as a risky borrower

To reactivate your account, your creditor will contact you with specific instructions. Note that you will not receive an adverse action notice if your card issuer suspends your credit account due to a stolen or lost card or fraudulent activity.

If the reason for your account suspension is not swiftly resolved, your credit issuer may decide to close your account altogether. The effect an account closure will have on your score depends on the state of the account when closed. If you are in good standing, your score will most likely not be dinged. However, if the account is in default and has been sent to collections, this could stay on your credit report for seven years and have negative consequences.

If your creditor decides to close your account for a reason that is unrelated to your credit score, they are not required to send an adverse action notice. If this happens, consider contacting your creditor to discuss the reason for the closure.

How to avoid this type of adverse action: To keep your account active and in good standing, regularly use your credit card to make purchases and make on-time monthly payments.

Once you understand the cause of your adverse action notice, you’ll want to read the fine print to understand your consumer rights to help you determine which steps to take next.

Does adverse action affect your credit score?

An adverse action notice won’t hurt your credit score or appear on your credit report. However, if the lender pulls a hard credit inquiry, your credit may take a minor temporary hit. While hard inquiries stay on your credit report for two years, their effects on your credit typically last under a year.

Next steps

Once you’ve received an adverse action notice, you’ll want to ensure the situation is handled properly, which will help prevent another denial. Specific actions will depend on the type of adverse action your creditor takes. As a general rule of thumb, consider the following tips:

1. Order free copies of your credit reports. The Fair Credit Reporting Act gives consumers the right to a free credit report from all three credit bureaus within 60 days of receiving an adverse action notice.
2. Review your reports carefully. Use the Consumer Financial Protection Bureau’s checklist to highlight inaccurate and outdated information and look for suspicious activity that could indicate identity theft. Contact your creditor to dispute any errors.
3. Review your budget and emergency savings. Analyze how your spending habits may affect your ability to pay off debts. Make it a priority to pay your bills on time and pay down your credit cards. By pinpointing areas where you can improve, you’ll reduce your chances of receiving another adverse action notice.
4. Consider seeking a different lender or product. Each lender has different criteria for approval. Just because you’ve been denied a line of credit with one lender doesn’t mean another wouldn’t approve you. Alternatively, consider applying for a different product, such as a secured loan versus an unsecured one.
5. Commit to responsible credit management. Remember to ensure that you can make responsible, on-time payments before applying for any line of credit. Recommit to healthy credit habits to improve your credit.

Once you’ve handled the logistics, look into working with Lexington Law Firm on your credit situation. We could help you pursue creditworthiness with our services by addressing inaccurate information on your credit reports.

Although receiving an adverse action notice is unfortunate, it’s also avoidable. By maintaining good credit health, you’ll set yourself up for success and open the doors to more financial possibilities.