Not all loan or credit applications end happily. Sometimes, you might apply for a loan or line of credit that you believe you qualify for, only to be denied. When this happens, your denial should be accompanied by an FCRA adverse action letter.
Today, let’s break down what an FCRA adverse action letter is, what’s included, and how you can avoid getting an FCRA adverse action letter in the future.
In a nutshell, an adverse action letter is an explanatory document breaking down why you were denied for credit, a loan, a job, or something else on the grounds of credit information.
Say that you apply for a mortgage so you can purchase a new home. If you are denied that mortgage because your credit score wasn't high enough or for some other related reason, you'll receive an adverse action letter explaining the problem.
However, adverse action letters are not required if the reason for the denial did not have to do with your credit. Imagine that you apply for a mortgage once again. However, in your mortgage application, you explain that you don’t have enough money for the requested down payment. Then, the mortgagor could deny your application on the grounds that you don’t have enough money on-hand rather than on credit-related grounds.
The Fair Credit Reporting Act requires credit furnishers – that is, any organization that supplies credit information to the credit bureaus, including lenders, mortgagors, banks, businesses, utility companies, etc. – to provide adverse action letters whenever they deny consumers something on the grounds of credit.
This is to ensure that consumers understand how their credit affects their financial opportunities and so they know how to improve their financial options later on. For instance, if a lender denies a borrower an application because their credit score isn’t high enough, they are obligated to tell the borrower that information specifically. The lender can’t just say, “you don’t qualify,” and not go into any detail. The lender has to say, “your credit did not meet our internal minimum requirements.”
Any given adverse action letter will include a variety of helpful information that consumers can use to improve their credit scores and their financial creditworthiness. Adverse action letters are legally required to include the below information at a minimum:
The last note is particularly important. It outlines consumer rights so they can contest or dispute inaccurate credit information.
Say that you are denied a loan because your credit score is too low. But when you receive your adverse action letter, you notice that your credit score is too low, according to what you believe your credit score to be.
When you investigate your credit report, you find inaccurate line items negatively affecting your credit report. Then you file dispute letters and reapply to get the loan you deserve (once your credit score is back up to its rightful place).
Consumers receive adverse action letters primarily so they receive comprehensive information about their credit score, credit report, and the reasons for application denial. This is important for public knowledge and for legal protection for companies.
Say that a company denies a borrower a loan. The company benefits from adverse action letters because it's an opportunity to explain why it decided on a denial – that way, consumers can't accuse companies of discrimination or other unfair practices (an especially salient concern for certain organizations, like lenders).
Remember, as a consumer, you will only receive an adverse action letter if you are denied for something because of your credit information. If you are denied for any other reason, you will not receive an adverse action letter explaining the matter. Some reasons you might be denied a loan or other decision include:
In addition, companies are legally required to list up to four of the key or primary factors that adversely affect your credit score (if applicable). This can also include there being a record of too many hard inquiries on your credit report in recent history (i.e., you applied for too many lines of credit or loans over the last few months).
After receiving an adverse action notice, you can and should take a look at your credit report to double-check the information from the lender/letter sender. For instance, if you apply for a mortgage and the lender says that your credit score is too low, follow the information on your adverse action letter to obtain a free copy of your credit report.
Not only is this wise so you better understand your overall financial health, but it also lets you make sure that the lender has their information right. If you check your credit report and see that your credit score should be good enough for the loan, you can write a response letter to the lender explaining your point of view.
If you’re correct, the lender may be more than happy to re-run your credit and reconsider your application.
If you receive an adverse action letter, don’t give up. You can improve your credit score and make your credit profile more attractive to lenders by practicing some smart financial steps. Here are some examples:
An FCRA adverse action letter is an explanation for why you were denied a loan, line of credit, insurance coverage, job, or anything else if you were denied because of your credit report. FCRA adverse action letters are required by the Fair Credit Reporting Act, and they can be used to strengthen future financial applications from consumers like you.