The upside of an adverse action notice

A credit denial can be the catalyst that leads to lasting financial change


An adverse action notice provides insight into building a brighter financial future
An adverse action notice provides insight into building a brighter financial future

Whether you're dating, looking for a job or applying for a new credit card, rejection can sting. However, adverse action notices -- the formal rejections you get when your credit application is denied -- can alert you to problems with your credit report and prompt you to get your financial house in order.

An adverse action notice is a communication required by law that lets you know you've had some type of negative action taken against you because of information contained in a consumer report. Under the Fair Credit Reporting Act (FCRA), lenders and other businesses must let you know why they've taken the action against you. While the law doesn't give lenders a due date for providing this information, it states that adverse action notices must be given "within a reasonable period of time."

The notice might inform you that you've been denied credit altogether or it could let you know that you must pay a higher interest rate than you expected. Adverse action notices may also be issued when you've been denied employment since some employers use credit history as a factor when making hiring decisions.

"An adverse action notice gives you a lot of insight and power because it tells you which credit bureau [was used] and it tells you why you were denied," says Mark Clayborne, author of "Hidden Credit Repair Secrets."

An adverse action notice gives you a lot of insight and power because it tells you which credit bureau [was used] and it tells you why you were denied.

-- Mark Clayborne
Author, "Hidden Credit Repair Secrets"

Clayborne should know. Several years ago, he received adverse action letters letting him know his credit not only was keeping him from getting the credit card and loan terms he wanted, but it was affecting his employment options, too.

Having been a criminal justice major in college, Clayborne wanted to begin a career in law enforcement when "a recruiter told me you need to do something about your credit or you'll never be a police officer," he recalls. Those letters were Clayborne's calls to action, inspiring him to educate himself about improving his credit and ultimately writing a book that detailed his process.

A sign of a bigger problem
An adverse action notice can also be a red flag alerting you to identity theft, says Thomas Nitzsche, spokesman for ClearPoint Credit Counseling Solutions, based in Atlanta. "If a letter shows up in your mail and you haven't applied for credit, you really need to take a look at your credit report to make sure that your information isn't compromised," Nitzsche says.

The adverse action notice can be communicated either orally, in writing or via digital form. If your credit score factored in the decision, the lender must let you know what your score was when your application was reviewed. The notice must include the contact information for the credit bureau that issued the report used to make the decision and inform you of your right to get a free copy of that credit report within 60 days. The adverse action notice must also let you know that the credit bureau had nothing to do with the decision. Finally, the notice must let you know of your right to dispute the accuracy of the information that's included in the credit report.

Once you've received an adverse action notice, it shouldn't be business as usual. Instead, take the following steps to ensure a better outcome in the future.

1. Understand why you were denied. Pay particular attention to the reasons cited in the adverse action notice. For example, if it says your high debt load was the deciding factor, start paying down your debt. Or perhaps if the reason stated is because you have too many open accounts, you may want to see whether it would be smart to strategically close a card or two.

2. Pull your credit report. "You want to see what's on there that's causing the rejection," says Jenna Boerger, a financial counselor with The Village Family Service Center, a National Foundation for Credit Counseling-affiliated financial resource center based in Fargo, North Dakota. Sometimes misinformation on the credit report could be the culprit. In that case, you can dispute the error by contacting the credit bureau directly.

Sometimes lenders and other companies look beyond traditional credit reports when making their decisions, and use specialty reports that collect such data as rental history and checking account usage.

"There are all kinds of reports now that people don't even realize exist," says Ruth Susswein, a spokeswoman for consumer advocacy organization Consumer Action. If that's the case, the adverse action notice would list those specialty reports and you'd have the same rights under the FCRA to get a free copy of the report and dispute the information, Susswein adds.

3. Strategically apply again. The amount of time you let pass before re-applying to seek better terms depends upon how much work you must do to improve your credit. If it's simply a matter of paying off a credit card account, you may decide to apply again a few months after you've done so. If you have a very low credit score, it may take more time and persistence to raise those numbers.

"Payment history is the biggest factor in one's credit score, so getting those accounts current and maintaining those accounts is the best thing to do," says Boerger.

While nobody welcomes receiving an adverse action notice, it can provide an incentive to take a more proactive approach to your finances.

"Many people have put their heads in the sand when it comes to personal finance," Nitzsche says. "This could give them the courage to face it."

See related: Even with high credit score, some card applicants rejected, Rejected for credit: It could be because you're dead

Published: July 15, 2015

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