What is an adverse action notice?

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In a Nutshell

An adverse action notice is an explanation that issuers must give you if you’re denied credit — or if you’re given less favorable financing terms — based on your credit history. You may also get an adverse action notice if your credit is a reason an employer turns you down for a job.
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If you’ve been denied credit because of information in your credit reports, the company you applied with must send you what’s known as an adverse action notice.

Whether it’s for a new credit card, an auto loan or a second date, rejection stings. But unlike dating app users, lenders can’t mysteriously ghost you if your credit is what led to your rejection.

There are many reasons a company may look at your credit. Learn more about why adverse action notices are sent, what’s contained in a notice, how to dispute inaccuracies and how you can use one to try to improve your credit for the future.

What is an adverse action notice?

If a lender or company denies you for credit because of information in your credit reports, it  must give you an explanation for the denial. This is known as an adverse action notice.

The Fair Credit Reporting Act and the Equal Credit Opportunity Act require issuers to send adverse action notices in the following situations.

  • They deny your credit application or revokes your credit
  • They refuse to give you credit for the amount or terms you requested
  • They negatively change your account terms after reviewing your credit reports

If an issuer rejects your credit application based on information in your credit reports you will typically receive an adverse action notice in the mail. Learn more about the information on your credit reports and how to read it.

If you’re applying for a job, the employer must provide you written notice that the information may be used in making decisions about your employment and receive your written permission. If the company is considering not hiring you because of the information it received, it must give you a copy of the info it relied on and a special summary of your rights under Fair Credit Reporting Act. The notice you receive will contain different information than the adverse action notice you receive when denied credit, but both notices aim to inform you about the information relied on to make the decision and your rights moving forward.

This gives you a chance to dispute the information. If you’re rejected because of the background check, you’ll receive an adverse action notice that is slightly different from the one that you’d receive if you were denied credit.

The information you find in an adverse action notice can give you more insight to help you improve your credit.

How do companies use my credit when making a lending decision?

Lenders typically use information in your credit reports to help decide if you’re a high-risk or low-risk borrower. Your credit may lead to an approval or denial and can influence the interest rate and other terms of your loan.

What will you find in an adverse action notice?

The following items must be included if you get an adverse action notice related to a credit decision.

  • The name, address and phone number of the credit bureau that gave the company your credit report
  • A statement that the credit bureau didn’t make the adverse decision and can’t explain why the decision was made
  • A notice that you have 60 days to request a free copy of your credit report from the credit bureau
  • A notice that you can dispute the accuracy or completeness of any of the information provided by the credit bureau
  • Your credit score, if it was used to make the decision

This information is meant to help you better understand your rights and who to contact if it’s incorrect. You can also file a complaint with the Consumer Financial Protection Bureau if you believe you were wrongly denied credit.

How do you respond to an adverse action notice?

If you get an adverse action notice, you don’t have to respond in any way. But if you disagree with the action and want to dispute or appeal the decision, you may have an opportunity to do so.

Remember that you can request a free copy of your credit reports from each of the three major credit reporting agencies annually through annualcreditreport.com.

If you were turned down because of incomplete or inaccurate information on your credit reports, you can dispute the information with the credit bureaus. If you file a dispute with the credit bureaus, they’re required to investigate the dispute unless it’s determined to be “frivolous.”

What’s next?

No one wants to get an adverse action notice — but if you do, you can use that information to try to improve your credit going forward or fix any mistakes on your credit reports. The requirement for adverse action notices is an important protection that can help you better understand your credit.

About the author: Eric Rosenberg is a finance, travel and technology writer in Ventura, California. He has an MBA in finance from the University of Denver. When he’s away from the keyboard, Eric enjoys exploring the world, flying small… Read more.