What Is an Adverse Action Letter And What to Do Next

An adverse action letter is a formal notice a lender must send you when your credit application is denied or offers less favorable terms.

An adverse action letter is a form of communication from a creditor, landlord, or employer that is required to be issued if your application is denied due to information in your credit report. An adverse action letter is also known as an adverse action notice, which can be delivered electronically, orally, or in writing—however, the most common format is a letter. In most cases, you’ll receive an adverse action letter in the mail soon after your application is denied.

Why you receive an adverse action letter

Creditors, such as mortgage and auto lenders, personal lenders, and credit card companies are obviously allowed to deny you credit based on the information in your credit report. Fair Housing Laws allow landlords to do this as well when screening for potential tenants. And in more than 35 states, employers are allowed to use credit information when making hiring decisions. However, in any of these cases, if you are denied because of your credit report, an adverse action letter is required by law.

What will you find in an adverse action letter?

Creditors are required to issue an adverse action letter by the Fair Credit Reporting Act (FCRA) and the Equal Credit Opportunity Act (ECOA). In the letter, you’ll find some important information, including:

The specific reason(s) why your application for credit was denied.
Which credit bureau was used
Your credit score
Your right to a free credit report
Who made the decision

Credit bureau provided the credit report

You can expect to learn which of the three major credit bureaus provided the credit report, as well as contact information for the credit bureau. For example, mortgage lenders typically check your credit report and score from all three major credit reporting agencies (Equifax, Experian, and TransUnion), so if you’re rejected for a mortgage based on your credit report, you can receive as many as three different letters.

Credit score

You’ll also see your credit score listed on the adverse action letter, if it was used as part of the decision-making process.

Your right to a free copy of your credit report

The letter will also inform you of your right to a free copy of your credit report within 60 days from the date of the letter, as well as your right to dispute any inaccurate or incomplete information you find on it.

And finally, the letter makes clear that the credit reporting agency didn’t make the decision to reject your application—the creditor, landlord, or employer did.

In a nutshell, an adverse action letter doesn’t just tell you why you were denied credit, an apartment, or a job. It also informs you of your consumer rights in the situation and gives detailed information on how to exercise those rights to obtain your credit report and address any inaccuracies.

Will you always get an adverse action letter if an application is denied?

To be perfectly clear, a creditor or other entity is only required to send you an adverse action letter if you were denied because of the information in your credit report. For example, if you apply for an auto loan and are rejected solely because you don’t have enough income, the lender isn’t required to send you an adverse action letter.

Reasons why you could be denied credit

As mentioned in the previous section, the adverse action letter will contain one or more reasons why you were denied credit based on the information in your credit report. This isn’t an exhaustive list, but here are some common reasons you could see in your adverse action letter:

Too much debt relative to your income. This is also commonly known as your debt-to-income, or DTI ratio. As an example, mortgage lenders typically want to see that your monthly payments, including your new mortgage, are no greater than 45% of your pre-tax income. Your debt-to-income ratio is the percentage of your gross monthly income that goes toward debt payments; most lenders prefer a ratio below 36% to 45%.
Credit score too low. Some lenders don’t have specific credit score requirements, while others have formal minimums. For example, the lowest credit score you can get approved for a FHA mortgage with a low down payment is 580.
Not enough credit history. Lenders typically want to see that you have a history of using your credit responsibly.
Too many recent credit applications. Applying for several credit accounts in a short period of time is a major red flag for lenders and can be interpreted as a sign that you’re in financial trouble.
High credit utilization ratio. If you have a maxed-out credit card, it can be a reason for a creditor to deny your loan application.
Late payments. If you have a history of paying your bills late, it could be enough for a credit denial.
Too much existing credit with the lender. For example, one major credit card company only allows customers to have four active credit accounts at any given time.
Charge-off or collection accounts. If you have these, there’s a good chance that your credit score will also be low, and you have a history of late payments. But even for lenders who specialize in less-than-perfect credit histories, these could be a deal-breaker.

Should you be worried if you receive an adverse action letter?

Receiving an adverse action letter does not mean permanent disqualification from credit. It is a legally required notice that explains the specific reasons for a decision, which gives you the information to address those factors before reapplying.

What to do if you receive an adverse action letter?

If you receive an adverse action letter, the following steps could be helpful:

Read all denial reasons listed in the letter carefully.
Request your free credit report within 60 days using the contact information provided in the letter.
Review your credit report for errors or outdated information.
File a dispute with the credit bureau if you find inaccurate items.
Contact the creditor directly to ask whether the decision can be reconsidered.
Address the underlying issue — such as paying down debt to improve your debt-to-income ratio.
Reapply when your credit profile has improved or the specific issue has been resolved.

In some cases, you may be able to contact the creditor who made the decision and ask them to reconsider. For example, several credit card companies have specific phone numbers for rejected applicants who want to explain their circumstances if they were rejected because their credit report did not meet lender requirements. So, if this is a possibility, an adverse action letter can at least let you know which areas of your credit report need further explanation.

Perhaps the best way to use an adverse action letter to your advantage is to consider your negative credit information as a guide to improve your credit before you apply again. Did your adverse action letter point out your high credit utilization? Maybe prioritize paying down your accounts with the highest balances relative to their limits. Did you get rejected because you don’t have enough credit history? Look into getting a secured credit card or becoming an authorized user to help build your credit history. The point is that an adverse action letter is never fun to get, but it can be used as a tool to help improve your chances as a credit applicant going forward.

Can Upstart help if you received an adverse action letter?

If you received an adverse action letter after applying for a loan, it may be worth exploring lenders that use different underwriting criteria. Loans through Upstart consider factors beyond credit score, such as education² and employment history, which may make a difference for applicants who were denied elsewhere.

Frequently asked questions

Q: What is an adverse action letter?

A: An adverse action letter is a written notice required by federal law when a lender denies your credit application, reduces your credit limit, or offers you less favorable terms. It must state the specific reasons for the decision.

Q: Should I be worried if I receive an adverse action letter?

A: An adverse action letter is informational, not a permanent ban from credit. It tells you the exact reasons you were denied, which is the first step toward addressing those issues before reapplying.

Q: How long do I have to request a free credit report after receiving an adverse action letter?

A: You have 60 days from the date on the adverse action letter to request a free copy of the credit report that was used in the lender’s decision.

Q: What should I do first after receiving an adverse action letter?

A: Read the stated denial reasons carefully, then request your free credit report to verify the information is accurate. If you find errors, file a dispute with the credit bureau listed in the letter.

Q: Do all denied applications require an adverse action letter?

A: If your formal application was denied, you are entitled to a notice.

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