What they are and the next steps
Have you ever applied for financing, such as a credit card or loan, only to have your credit application turned down? If so, you know firsthand how a denial of credit can be.
And you probably didn’t find out that your credit application was denied until you received some sort of communication from the lender. This communication may have taken the form of what is formally known as an adverse reaction notice.
These notices of adverse action are often informally referred to as denial letters. These are valuable communications because they provide you with a lot of information about the lender’s decision.
While it’s best to never receive a rejection letter, understanding what these reviews say is a good idea.
Many businesses rely on consumer credit information when assessing potential customers. This is how they assess risk.
Credit card issuers and lenders don’t know you personally, so they need a way to determine if you are likely to repay the money you borrow as promised. The credit report and credit score meet this need. PaydayNow no checks have no intention of checking your credit reports.
When a lender reviews your credit reports or scores as part of your application, federal law requires that company to let you know when and if they are using your credit information as the basis for their decision. This is a law under the Fair Credit Reporting Act.
In other words, if a credit card issuer checks your credit and decides they don’t want to do business with you because of your credit report or score, they need to give you an explanation. This explanation is the refusal letter or, more formally, a notice of adverse action.
Insurers and employers can also check your credit (although employers only check credit reports, never credit scores). These types of businesses may also be required to provide adverse action notices. You may also receive an adverse action notice if an existing card issuer reviews your credit reports as part of their current account management practices and decides to alter the conditions of your account.
Credit problems, including a negative credit history or low credit scores, can cause a lender to decline your credit card or loan application. If a lender decides to deny your application because of your credit, there are three ways they can deliver your adverse action notice:
- In writing
While there are no statistics that track the method of delivery of adverse action notices, I have learned that such notices are almost always sent by US mail or sent as an attachment to some form of electronic communication.
The Fair Credit Reporting Act (FCRA) and the Equal Credit Opportunity Act (ECOA) are the two main federal laws that lenders must follow regarding notices of adverse action. These laws specify the information that lenders must disclose when they deny credit.
An adverse action letter must include:
- The name of the credit reporting agency (or agencies) that provided the credit report (s) the lender reviewed when you applied. It will almost always be Equifax, Experian, or TransUnion.
- Instructions on how to request your free credit report (s) within 60 days of being refused or offered less attractive financing terms. While this consumer right is appreciated, there are ways to get credit reports much more often than waiting 60 days.
- Information about your right to dispute the information on your credit report that you believe is incorrect. You have enjoyed this right for many decades.
- A copy of your credit score if the lender has reviewed it as part of your application. It is important. The credit score that the lender should provide you with should be the score that was used in their decision. The point is, if the lender denied your application because your Equifax credit score was 600, they must disclose that information.
If a lender looked at your credit score when you applied for financing, your adverse action will also include credit score range and the top four or five reasons why the score is not higher. They are known as reason codes or score factors, and they can be very useful when you want to understand why a lender considers you an unacceptable credit risk.
When you have less serious credit problems, a lender cannot categorically refuse your request for financing. Instead, a lender could make a counter offer with less favorable terms.
For example, if you apply for a credit card with an APR of 17.99%, the card issuer – after reviewing your credit – might decide to offer you an APR of 24.99% instead. Or maybe you qualify for a discount Credit limit than you expected or an account with fewer benefits.
When a lender offers you less attractive financing terms than advertised, this is called adverse approval. The Federal Trade Commission and the Consumer Financial Protection Bureau (CFPB) have identical rules that lenders must follow in these situations.
Namely, the credit card issuer or lender should send you a notice that you have been approved, but with terms that were not as good as others received. This notice is called a Risk Based Pricing Notice. Risk-based pricing notices are similar to adverse action notices in several ways.
For example, both types of disclosures contain general details about the credit bureau used by the lender to access your credit report. They should also tell you how to request a free copy of your credit report from the same credit bureau within 60 days. In addition, a risk-based pricing notice should explain that the financing terms offered to you could be more favorable if your credit were better.
When you receive an adverse action notice in the mail, you might be tempted to throw it in the trash. After all, who wants a reminder of his rejection?
But before you throw away a declination letter and pretend it never happened, know that the notice can contain valuable details, including a personalized roadmap to better credit.
If your denial letter includes a credit score, pay close attention to the factors that have the most influence on your score. Adverse action will generally include four credit score factors that explain why your credit score is not higher. And when too much difficult requests negatively impact your credit score, your denial letter may list five key credit score factors instead of four.
Now, it should be noted that the factors you find in adverse action letters may be vague. They are often form letters with only a general outline of the reasons why you have been refused credit. As such, you shouldn’t expect them to outline the exact steps you need to take to resolve your credit issues.
However, if you’re willing to dig a little deeper, an adverse action letter has the potential to help you understand exactly why a lender turned you down. Here are two strategies that can help you.
- If your lender used a VantageScore credit score to assess your claim, visit ReasonCode.org to find out why your score is not higher.
- FICO also provides a product sheet you can use if you want help deciphering the score factors associated with a FICO score. Both options will include a caption that will help explain the digital score factor that is printed on your rejection letter.
Even if you plan to ask a credit card issuer to reconsider your application, your credit score factors can still be of help. It’s a solid tool that you can use to develop a personalized credit improvement plan that will really deliver results.
For example, if one of your scoring factors indicates that your credit card balances are too high compared to your credit limits, it doesn’t make sense for you to pay off your installment loans early.
No one likes rejection, especially when it comes to credit denial. But you have two choices when a lender denies your credit application. You can’t do anything and hope it turns out better next time, or you can be proactive and start working on improving your credit.
Rebuilding your credit won’t happen overnight. But if you use an adverse reaction notice as a guide, you may be able to improve the chances of your credit card getting approved so that you are better prepared the next time you fill out an application for a new account.