If you've received an adverse action notice in the mail, you might be wondering what it means.
When someone takes out a loan, they need to fill out a loan application. Once this loan application is submitted, the lender will process the application and overview all the information to decide whether they can fund the loan or not. Lenders let you know whether your application was approved or denied by sending what’s called an adverse action.
An adverse action is a notice that lets someone know their application was denied. You could receive this notice in the form of a letter or an email.
When you apply for credit, a job, an installment loan, or insurance coverage and those applications are denied, the person or business that received your application might send you a formal "adverse action" notice or letter. This formal letter lets the applicant know their application did not get approved.
An adverse action notification can apply to many instances of denial or termination. You could receive an adverse action if you were denied a job, if your loan application was denied, or if you are being dropped from any other kind of contract or benefit.
The person or business that sends the adverse action will often have their own requirements that applicants must meet. The adverse action will usually outline which requirements you lacked or any other reasons why you weren't approved for the job, raise, promotion, or loan.
For instance, if you apply for a loan, your application might be denied because your credit score isn't high enough to meet the lender's credit score requirements.
Likewise, a job application might be denied due to something in your background check, like criminal history. In both instances, the company might send an adverse action as a way to let you know your application was denied.
The content of your adverse action letter includes information about why your application was not approved. Companies might not list every reason you were denied, but they will list a few of the main reasons you were denied.
Here are some examples of reasons your application might not get approved, resulting in an adverse action notice:
The adverse action will have some other basic information on it as well:
With the information found on an adverse action, you can now better understand where your credit score stands and how you might be able to improve your credit.
You can receive a notice of adverse action from many places and for many reasons. Here are a few examples of adverse action:
The adverse action will look different based on who is sending it.
If the adverse action is from your landlord then the notice will have the name of the property, the landlord, the landlord's signature, and bulleted lists outlining why your rental application was denied.
If the adverse action is from a financial institution, it will look similar, but the bulleted items will be financial requirements that applicants must meet, and not rental requirements that tenants must meet.
What is a pre adverse action letter?
A pre adverse action is a notice that comes before the official decision has been made. Pre adverse actions are used most often during the hiring process to let an applicant know that something failed in their background check.
A pre adverse action is not an official denial though. It simply informs the applicant that the company is considering denying or withdrawing their job offer and why that is the case.
Just like an official adverse action, a pre adverse action notice contains the following information:
The reason some employers will send a pre adverse action is to give the applicant time to dispute the application denial before the denial is official. This is especially helpful in the case of a failed background check.
There are many reasons you might receive an adverse action. When you get an adverse action you will most likely receive it electronically or in writing.
For example, many adverse actions will come to you in the mail or via email.
When you get an adverse action, you can expect to get it anywhere around 7 to 10 business days after you've been denied.
Here are just a few examples of the instances when you might get an adverse action:
There are also some rules and guidelines for applications set by the Equal Credit Opportunity Act (ECOA) and the Fair Credit Reporting Act (FCRA) that businesses must follow when approving and denying applications.
Be aware of your rights so you know when a denied application was justified or not.
For example, no one can deny you credit or employment because of your race, color, religion, national origin, sex, marital status, age, or because you get public assistance.
So you got an adverse action. You're probably wondering what to do now.
The first thing you need to do when you get an adverse action is understand your rights.
For example, when your application is denied based on your credit, consumer, or criminal history then the party that denied your application is legally obligated to send you a formal adverse action, outlining why you were denied.
They also need to provide the contact information of the agency they used to get your credit, consumer, or criminal history so you can also access that information.
Once you understand your rights, get your own credit report to see your credit score and credit history for yourself.
Now that you have your own credit report in hand, check your credit history for any errors. If you do find an error, an inaccuracy, an instance of fraud, or an incomplete area, dispute it directly with the credit agency to get it fixed.
After taking care of any potential errors on your credit report, you can use insights from your credit report to work on improving your credit score.
A typical credit report includes your payment history, amounts owed, the length of your credit history, credit mix, and any new credit. So if you are frequently late making payments you'll see this information here and can work on making this part of your credit history better.
By working to better your credit score, you can eventually apply again with more confidence, knowing that the reasons you were denied have improved.
An applicant's credit history is very informative for the people and company's processing your application.
By looking at a credit report, they can know if you will make payments on time, if you can handle this amount of debt, and how responsible you are overall with your finances.
The best way to avoid an adverse action is to prevent negative marks on your credit report in the first place. The following are a few examples of negative actions you want to avoid getting on your credit report:
Avoid late or missed payments first by living within your means.
If you are currently living paycheck to paycheck, find a way to increase your monthly income or downgrade your lifestyle to better fit the budget you have. This will make it a lot easier to keep up with all your payments.
You can also make use of autopay options wherever you can. Autopay is a great way to automate your budget and never miss or be late on a payment again.
What does it mean to default on a credit account?
Defaulting on credit is when you've missed multiple payments on a debt or fail to make payments on that debt at all. Avoid defaulting on credit accounts by avoiding going into debt you can't afford.
Each time you take on a debt, it should be carefully planned into your current monthly budget. If it won't fit into your budget, then seek out other options.
Your total debt becomes too high when it goes over a certain debt to income ratio. The ideal debt to income ratio is under 36%. This means that ideally, you would only have 36% of your monthly income going toward debts.
Typically, 43% is the highest many lenders will accept when processing an application for a loan or line of credit. But you want to keep your debt to income ratio lower than this whenever you can.
If your overall debt payments are higher than 40% of your income, then make a strict budget and payment game plan to start reducing your debts.
You can also help prevent these negative marks on your credit history by keeping tabs on your credit report yourself.
Don't wait for an application to get denied to check out your own credit history.
Once a year, go through your consumer and credit history for accuracy and to see how you are doing.
This way you will be aware of any financially unhealthy habits you need to work on and you'll be able to catch and take care of mistakes before submitting applications that will look at your credit history.
Not all financial actions get counted in your credit score unless you do something to make them count.
For instance, make sure your on-time utility or phone payments are going toward boosting your credit score by contacting your credit agency and allowing them to add that information to your credit file.
If you plan responsibly, you can also use credit cards to make all these payments, then pay off your credit card immediately in order to make this positive payment history impact your credit history for the better.
Now that you know what an adverse action is, you can be in the know if you ever get one. Review the adverse action letter for information that will help you understand why your application was denied. If you have any more questions or concerns, you can contact the lender that sent your adverse action letter.
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