When you apply for credit and have been denied, companies are required to send you what is known as an adverse action notice. An adverse action notice is a disclosure that creditors send to you after you have been denied credit, explaining the reasons why. Understanding when you should receive an adverse action notice and what information you are owed can help you move forward after a credit denial.
What Is an Adverse Action Notice?
An adverse action notice is a written, electronic, or verbal disclosure creditors must issue to consumers after their credit-based application (a credit card or loan, for example) is denied or they face another negative credit-related action. The purpose of the notice is to communicate the reason for the denial.
How an Adverse Action Notice Works
Under the Fair Credit Reporting Act (FCRA), creditors, lenders, and other businesses must send you an adverse action notice in these scenarios:
- Your credit application is denied.
- You are not extended credit in the amount or terms you wanted.
- Negative changes are made to your credit account terms because of information in your credit report.
You can expect to receive the adverse action notice within 30 to 90 days, depending on the nature of the action: 30 days after you complete an application in response to an adverse action against the application
- 30 days after you face an adverse action on an incomplete application
- 30 days after an adverse action on an existing account
- 90 days after you accept a counteroffer if you did not accept or use the credit that the lender offered
For example, let's say that you have excellent credit and apply for a new credit card. But you accidentally submit an incomplete application, so the creditor denies your application. If you were unaware that you did not adequately fill out the application, you might be left scratching your head as to why you, with your stellar credit, were denied. Fortunately, under the FCRA, within 30 days of the denial, you can expect to receive an adverse action notifying you of the reason you were denied: your application was incomplete. With that information, you can overcome the denial and take steps to avoid another one when you next apply for credit.
If you are granted credit, but with significantly worse terms than the most favorable terms received by a substantial number of other consumers based on information in your credit report, you will receive a separate disclosure known as a risk-based pricing notice.
What Does an Adverse Action Notice Cover?
The information in the adverse action will depend on the information that was used to take the action against you—namely, whether you were denied because of information in a credit report from a credit bureau (also known as a credit or consumer reporting agency) or because of information from an outside source other than a credit bureau or data outside of a credit report.
Denial Due to Information in a Credit Report From a Bureau
If data in a credit report from a credit bureau played a role in the adverse action against you, the notice will indicate the name of the credit bureau that provided the credit report used in the decision along with the bureau's address and phone number.
The notice will also state that the credit bureau wasn't involved in the decision and that the bureau can't tell you why your application was denied. However, those reasons will be listed in the adverse action notice, and may include, among others:
- An incomplete credit application
- Insufficient income
- Unverifiable employment
- Limited or no credit
- An insufficient number or invalid type of credit references
- Past or present delinquent accounts
- Foreclosures or repossessions
When your credit score is used in the decision, the notice must also list, among other details, your credit score, the range of possible credit scores, and four factors that contributed to your credit score (five if one of the factors was the number of inquiries into the credit report). There's no cost for this credit score.
A notice of adverse action based on information in a credit report from a bureau must also communicate your right to a free copy of the credit report and how to get one from the credit bureau listed in the notice (the bureau's toll-free number will usually be given for reference). You'll have 60 days to order this credit report, so act quickly.
The adverse action notice will also include a disclosure of your right to dispute any inaccurate or incomplete information in your credit report. It's particularly important to contact the credit bureau and order your free credit report if you're surprised about the denial. You could have a case of fraud on your hands, if, for example, your account information was exposed in a data breach. Worse, you could be a victim of identity theft—for example, if someone used your personal information to open accounts in your name.
There will be an Equal Credit Opportunity Act (ECOA) notice at the end of the adverse action stating that it's illegal to deny your application based on race, religion, national origin, gender, marital status, age (as long as you're old enough to sign a contract), participation in a public assistance program, or the exercise of your Consumer Credit Protection Act rights.
Adverse Action Notice for Other Reasons
If you had a credit card or loan application denied, but because of information from an outside source other than a credit bureau or information other than data from your credit report, you'll still receive an adverse action notice.
The adverse action notice will still list the name, address, and phone number of the outside source, your credit score, and possible score ranges (if a score was used to make the credit decision), and the ECOA notice at the end of the disclosure. But as a credit bureau won't be involved, the notice of adverse action won't mention the contact information of a credit bureau or how to obtain a free credit report.
Instead, it will inform you of your right to make a written request for the nature of the outside information that was used to take the adverse action. Again, you'll have 60 days to make this request.
How to Respond After an Adverse Action Notice
If you were denied because of information in a credit report from a credit bureau, order a free copy of your credit report by following the instructions listed in the notice of adverse action. Review your credit report for accuracy and dispute any errors with the credit bureau. The credit bureau will investigate your dispute, and, if valid, clear up the error.
You're entitled to a free copy of your credit report with Equifax, Experian, and TransUnion once every 12 months.
If information from a source other than a credit report from a credit bureau was to blame for the denial, request the information regarding the outside source using the comparable contact information in the notice.
In either case, it's important to use the information in your adverse action notice to understand why your application was denied. For example, if the reason for the denial is that your income is insufficient, look for opportunities to increase it before you reapply for credit. Whatever the reason for denial, carefully evaluating the adverse action notice can help you take the appropriate steps to improve your chances of getting approved the next time you apply.
- An adverse action notice is a disclosure you receive from creditors after you have been denied credit that states the reason for the denial.
- You may also get the notice if you are extended credit in an amount or terms you didn't want or observe negative changes to your credit account terms because of information in your credit report.
- You'll receive the notice within 30 to 90 days of the adverse action.
- The information in the adverse action depends on whether you were denied because of information in a credit report from a bureau or information from an outside source other than a credit bureau or data outside of a credit report.