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Credit Scores and Reports

What is an adverse action notice?

Receiving an adverse action notice after you're denied credit is a bummer, but you can learn from it

Summary

If negative information in your credit report results in being rejected for credit, federal law requires that you be informed through an adverse action notice. While receiving one can be a bummer, it can also help you learn how to improve your creditworthiness.

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If negative information in your credit report results in your being rejected for credit, federal law requires that you be informed through what’s known as an adverse action notice.

While receiving this notice can be a bummer, it also can be a learning opportunity.

See related: How to apply for a credit card and get approved

Why you may be denied credit

An adverse action notice might explain why you were denied credit, the most common reason for receiving a notice.

Among the causes of a denial are your credit score being too low, your debt-to-income ratio being too high or your credit history including too many late payments. Other examples of why you might be denied credit are:

  • Your application is incomplete.
  • Your income fails to meet the lender’s standards.
  • Your credit file is thin, meaning you have too few active accounts.
  • You have too many open accounts.
  • You’re using too much of your available credit. This is measured with your credit utilization ratio, which looks at much you owe versus your overall credit limit and accounts for 30% of your credit score.

Aside from being informed that your credit application has been denied, reasons for receiving an adverse action notice include telling you why your credit limit went down, why your annual percentage rate (APR) went up, why you weren’t approved for an increase in your credit limit or why your account was shut down.

What will you find in an adverse action notice?

An adverse action notice, typically in the form of a letter, will include the following information:

  • The name, address and phone number of the credit bureau that supplied the credit report. The three major credit bureaus are Equifax, Experian and TransUnion.
  • A declaration that the credit bureau didn’t make the credit decision and can’t explain why it was made.
  • A notification that you’re entitled to a free copy of the credit bureau’s credit report if you request it within 60 days.
  • A statement that you can dispute insufficient or incorrect information in the credit report.
  • Your credit score if a score was used in making the decision.

Two federal laws – the Equal Credit Opportunity Act and the Fair Credit Report Act – spell out when an adverse action notice is supposed to be sent and what the notice should say.

Does an adverse action notice affect your credit score?

Although an adverse action notice delivers bad news, it doesn’t affect your credit score. It also won’t appear on your credit report.

See related: Does being denied a credit card affect your credit score?

What can you learn from an adverse action notice?

Receiving an adverse action notice stings. But you can turn that negative into a positive.

An adverse action notice might highlight problems with your credit that you’ve ignored or you weren’t aware of. Once you have this knowledge, you can take action to fix those problems and potentially improve your credit.

For instance, you might see that your credit report contains inaccurate data that’s hurting your credit score, or you might realize your low credit score is harming your ability to obtain credit.

The free credit report that you can request after getting an adverse action notice also can point out credit issues that should be addressed.

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The editorial content on this page is based solely on the objective assessment of our writers and is not driven by advertising dollars. It has not been provided or commissioned by the credit card issuers. However, we may receive compensation when you click on links to products from our partners.

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