Adverse Action Notice: What It Is + Next Steps

What Is an Adverse Action Notice?

An adverse action notice is a formal communication sent by a lender, creditor, employer, or insurer informing you of a negative decision based on information obtained from your credit report, background check, or application. The notice is required under the Fair Credit Reporting Act (FCRA) and the Equal Credit Opportunity Act (ECOA) to ensure transparency and provide consumers with an opportunity to address any discrepancies.

Adverse action notices are commonly issued when you are denied a loan, credit card, employment, insurance, or another financial service due to unfavourable findings in your credit history or background check. Receiving one can be concerning, but understanding its purpose and knowing your rights can help you take the necessary next steps to improve your credit standing and financial health.

What Does an Adverse Action Notice Include?

An adverse action notice must contain specific information as mandated by federal law. The following details are typically included:

• Reason for Adverse Action – A brief explanation of why the action was taken, such as a low credit score, high debt-to-income ratio, or negative credit history.
• Credit Reporting Agency Information – If the decision was based on a credit report, the notice must provide the name, address, and phone number of the credit reporting agency (Experian, Equifax, or TransUnion).
• Consumer Rights Disclosure – A statement explaining your right to obtain a free copy of your credit report within 60 days and dispute any inaccurate or incomplete information.
• Credit Score Disclosure (if applicable) – If your credit score was a factor, the notice must include your credit score, the date it was pulled, and key factors affecting it.
• Contact Information – Instructions on how to dispute the decision or seek further clarification from the entity that issued the notice.

Types of Adverse Actions

Adverse actions can take different forms depending on the industry and type of application submitted. Below are some of the most common types of adverse actions consumers may face:

1. Credit Denial

One of the most frequent adverse actions is the denial of a credit application. Whether you apply for a credit card, personal loan, mortgage, or auto loan, lenders evaluate your creditworthiness based on your credit history, income, and debt obligations. If your credit profile does not meet their lending criteria, they may deny your application and issue an adverse action notice explaining the reason.

2. Credit Limit Reduction or Denial of Credit Increase

Even if you have an existing credit account, creditors may decide to lower your credit limit or deny your request for a credit limit increase. This can happen if your credit score drops, your debt levels rise, or the lender reevaluates their risk exposure. A lower credit limit can impact your credit utilization ratio, potentially affecting your overall credit score.

3. Interest Rate Increase

Creditors may increase your interest rate due to changes in your credit profile, late payments, or other risk factors. If your credit card issuer raises your interest rate, they are required to notify you in advance. While this is not always classified as an adverse action, it can significantly impact your financial obligations by making borrowing more expensive.

4. Account Suspension or Closure

A bank, lender, or credit card issuer may suspend or close your account due to inactivity, high risk, or negative information in your credit report. When this happens, an adverse action notice is sent to inform you of the decision. Losing access to credit can impact your financial flexibility and credit score, so it’s crucial to understand why the action was taken.

Does Adverse Action Affect Your Credit Score?

Receiving an adverse action notice does not directly affect your credit score. However, the factors leading to the adverse action, such as missed payments, high debt levels, or too many credit inquiries, may already be negatively impacting your score. If your credit application was denied, the hard inquiry from the application process may cause a small temporary dip in your credit score.