What Is An Adverse Action Letter?

By Yhordan Serpentini | November 4, 2022

One of the most difficult positions small business owners sometimes find themselves in is being denied something due to their personal or business credit. Credit is one of the most common options available for new and returning entrepreneurs for receiving access to capital, and with a bad or moderate credit score, you may be denied a loan, employment, insurance coverage, or other important necessities—sometimes even with a good credit score.

Upon being denied whatever you had applied for, you will also receive a letter known as an Adverse Action Letter or an Adverse Action Notice. If you are thinking to yourself: “what is an adverse action letter?” then don’t worry! Here is everything you need to know about an adverse action letter, and how to reduce future credit denial.

What is An Adverse Action Letter?

As briefly mentioned, an adverse action letter is an oral statement or electronically written document that is given to you to inform you that you have been denied the requested resources, employment, insurance coverage, or other capital-related benefits due to your credit or credit report. Usually, the letter is mailed and received in between a seven to 10 business day period, but there are instances where it may be received sooner or later than the estimated time, given your location of residence.

Why Will You Receive It?

You will commonly receive an adverse action letter when you are denied benefits due to your credit or credit report; however, it is required by federal law—specifically, the Fair Credit Reporting Act, and the Equal Credit Opportunity Act—that companies provide an adverse action letter. You will receive an adverse action letter for some of the following reasons:

Debt to income ratio is too high

Credit history is too short

Late credit payments

The creditor’s minimum credit score requirement is not met

Bankruptcy

Foreclosure

Additionally, you or a customer may be denied by a creditor if you already have existing credit with them, especially if the benefits you are requesting are too much when added to the total provided credit.

What To Do If You Received An Adverse Action Letter

There is not much you can do to help your current self if you received an adverse action letter; however, with the provided information included in the letter, as well as other financial strategies, there are things you can do to help you avoid receiving future denials—we will come back to this in a little bit.

For starters, the only other way your current situation can be saved is through a dispute. The most important information included in your adverse action letter is your credit score, the contact information of the credit reporting agency that gave the credit report, and the reasons for the decision to your denial.

These three factors will help you better understand if there was a mistake or a reasonable reason for filing a dispute against the accuracy of the information supplied by the credit reporting agency. If there was any misinformation, inaccuracies, or unreasonable justifications for your denial, then you have the right to file a dispute.

If you cannot dispute your adverse action letter, then you may need to focus more on what is affecting your credit score so you can avoid future denials.

how to Avoid Future Letters

It is very possible for you to avoid future denials and adverse action letters, though it will require an immense amount of financial discipline and time. There are multiple factors that result in the decision to deny a customer’s credit, the most important one being your FICO Score.

Your score is affected by your payment history—this means how late, early, and the quantity of the payment is—the total amount of debt or credit owed to lenders and debt collectors, your credit history (including the length of which it has been active), and your previous, existing, or new credit.

Of course, there are many solutions to keeping a positive credit score, some of which are far easier said than done; however, remember that if your debt-to-income ratio is too high, you may need to relax about how much credit you are attempting to receive. Sell what you don’t need, and avoid buying unnecessary things and receiving unnecessary credit.

Pay all of your bills on time, or even a little earlier—just don’t pay too early as that comes with its own negative setbacks, as ironic as it sounds—starting with the smallest amount, and working your way towards the larger credit. Most individuals believe paying off the larger debts first is better, but it is quite the opposite. The more you pay off the smaller debts, the more money you can keep to place in the bigger debts, allowing you to pay in bigger quantities while also leaving breathing room for emergencies or unexpected incidents.

After a year, you should see a relatively decent change in your score. Once you feel comfortable enough with your score, payment history, and existing credit, you can then reapply to the same creditor or a different lender.