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Understanding Adverse Action Letters and How to Respond

An adverse action letter is a notification that you’ve been denied credit, employment, or an insurance policy. This notice provides you with information about why you were denied and offers helpful resources to determine your next steps.

What Is an Adverse Action Letter?

When a lender, insurance agency, employer, or other organization denies you credit, employment, or other services due to information found in your credit report, they are required by the Fair Credit Reporting Act and the Equal Credit Opportunity Act to inform you why. This notice can be delivered orally, electronically, or in writing, and you can typically expect to receive it within seven to ten business days of the denial.

What Is Included in an Adverse Action Letter?

An adverse action letter must include the following information:

• Your credit score, if it was used in the decision, along with the date the score was created and the range of possible credit scores based on the model used.
• 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 (up to five).
• Notice of your right to a free copy of your credit report within 60 days and how to obtain it.
• Notice of your right to dispute the accuracy or completeness of any information provided by the credit reporting agency.

This information helps you understand your credit history and identify areas that need improvement.

Why Did I Receive an Adverse Action Notice?

You may 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 not meeting the creditor’s minimum requirement
• Too much debt relative to your income
• Insufficient 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 key factors affecting your credit score. If the number of hard inquiries is one of the factors, they must include five factors.

How to Respond to an Adverse Action Letter

While you don’t necessarily need to respond, you can reach out to the company that provided the letter if you believe your situation deserves context. For instance, if you find debt or derogatory marks you don’t recognize, you can explain the situation and indicate your intention to dispute the information with the credit bureaus. If you applied for a mortgage loan, you might 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 to reconsider, here are some steps to improve your credit situation and increase your chances of approval next time:

1. Review the Reasons for Denial

Understanding why you were denied can help you determine your next steps. For example, if it’s due to a high credit utilization rate, work on paying down high credit card balances. If you have too many recent credit inquiries, wait a few months before applying again.

2. Understand Which Factors Affect Your Credit Score

The primary factors influencing 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 and consider areas for improvement.

3. Review Your Credit Report

Get a free copy of your Experian credit report and visit AnnualCreditReport.com for free copies of your TransUnion and Equifax reports. Look for anything that could be hurting your credit score and make a plan to address it.

4. Dispute Inaccurate Information

If you find inaccurate or fraudulent information, you have the right to file a dispute with the credit reporting agencies. Once the investigation is complete, the information will either be corrected, updated, or verified as accurate.

5. Wait to Apply Again

It can take time for your efforts to reflect in your credit reports and score. Monitor your credit to understand when the time is right to submit another application.

How to Improve Your Credit

Based on your adverse action letter, prioritize steps to address specific reasons for denial. Additionally, consider these actions to build your credit score:

• Pay your bills on time.
• Pay down credit cards.
• Avoid unnecessary credit applications.
• Get credit for other payments through services like Experian Boost®.
• Get added as an authorized user on a family member’s credit card account.

Consider Other Options in the Meantime

While improving your credit, you may still need credit urgently. Some lenders specialize in working with people who have less-than-stellar credit. While their terms may not be as favorable, they can provide the credit you need. Consider these options only if you absolutely need credit now and can’t wait to improve your credit situation.

For any mortgage-related needs, call O1ne Mortgage at 213-732-3074. Our team is here to help you navigate your options and find the best solution for your financial situation.

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