Adverse Action

Adverse action summary:

• When you’re denied a loan or increase in your credit limit, the creditor is required by law to notify you of this adverse action in writing.

• The creditor will send an adverse action notice that details why you were turned down and includes the information that went into the decision. 

• You could use the information in the adverse action to challenge the decision. 

Adverse action definition and meaning

When you apply to borrow money via a personal loan, credit card, mortgage, or some other means, you’ll either be approved or denied based on your credit score and history with credit. If you ask a creditor you already know (like a credit card issuer) to raise your credit limit, they may say no. 

The denial is called an adverse action. 

Federal law says the creditor must tell you why you were denied by mail. These laws are called the Fair Credit Reporting Act and the Equal Credit Opportunity Act. Lenders can't consider things like your race or sex when deciding to approve a credit application. The notice you get informing you of an adverse action shows that you’re denied credit based on financial information.  

Key concept: An adverse action is when you are denied credit. Lenders must notify you about the reasons in writing, under federal law. 

Real-life example of an adverse action

Sam chooses a new credit card and applies online. Sam is sent to a webpage saying the credit card issuer needs more time to decide whether to approve or deny the application. Sam is told to expect a letter in the mail with the decision within seven to 10 business days. 

Sam gets an adverse action notice, which says that their credit utilization ratio is the reason the application for a new credit card is being denied. Sam is carrying credit card debt across all their current accounts, and the percentage is too high for the new card’s issuer to approve the application. 

The adverse action notice includes Sam’s credit score and information from the credit bureau whose data was used to make the decision. 

How to use an adverse action

An adverse action could prompt you to improve your creditworthiness if you haven’t been regularly checking your credit report and credit scores. 

It’s a good idea to check your credit profile a few times a year—at the very least, before you apply to borrow money. Knowing your credit score and the state of your credit report could help you target lenders that work with borrowers like you, saving you time. Also, if you can boost your credit before you borrow, you could save money on interest charges. 

• If your credit score is lagging because of late payments, set up autopay for at least the minimum payment on your existing credit accounts. 

• If it turns out you have a delinquent debt on your credit report, follow up with the lender and try to get current with payments. 

• If you’re overwhelmed by debt, you could seek debt relief. That’s when a creditor agrees to accept less than you owe and forgive the rest. 

• If it turns out that your credit score is low because of any errors on your credit report (such as accounts that don’t belong to you or debts you’ve already paid), you can request that they be removed.