How to read an adverse action notice

Getting turned down for a loan or credit card stings. But the letter or email the lender sends you is actually a useful tool. Federal law requires lenders to tell you the specific reasons they said no. That notice is called an adverse action notice.

Here is what you need to know about it.

What is an adverse action notice?

An adverse action notice is a written explanation from a lender. It tells you why your application was denied, or why your existing credit limit was cut, or why your account was closed. The Equal Credit Opportunity Act (ECOA) and the Fair Credit Reporting Act (FCRA) both require this disclosure. The lender must send it within 30 days of their decision.

The notice must include: - The name and contact information of the lender - A statement that you were denied credit - The specific reasons for the denial (usually listed as reason codes) - Information about your right to get a free credit report - The name of any credit bureau whose report was used

What are reason codes?

Reason codes are short phrases that explain what hurt your application. Lenders pick from a standard list. You may see up to four or five of them. Common reason codes include:

• 'Too many delinquent accounts' — you have past-due debts on record
• 'High proportion of revolving debt' — your credit card balances are too close to your limits
• 'Too many recent inquiries' — you applied for credit several times in a short period
• 'Insufficient credit history' — you have not had credit accounts long enough
• 'No credit file' — the bureau has little or no information about you
• 'Income insufficient for amount requested' — your income was too low for the size of the loan

The reason codes are listed in order of importance. The first one on the list had the biggest impact on the decision.

Your free credit report

If a credit bureau report was used, you have the right to get a free copy of that report within 60 days of receiving the notice. The notice will tell you which bureau to contact. You can also get free reports from all three major bureaus at AnnualCreditReport.com at any time.

When you get your report, look for the items that match your reason codes. For example, if the code says 'too many delinquent accounts,' find which accounts show as past due or in collections.

Check for errors too. Mistakes on credit reports are more common than people expect. If you spot an error, you have the right to dispute it directly with the credit bureau for free.

What to do after you read the notice

Take a breath. Being denied does not mean you can never get credit. It means the lender saw risk factors at this moment in time. Those factors can change.

Here are concrete steps to take:

• Write down every reason code from your notice
• Get the free credit report tied to the denial
• Read the report carefully and flag anything that does not look right
• Dispute errors in writing with the credit bureau (they must investigate within 30 days)
• Make a simple plan to address the top one or two reason codes
• Wait at least three to six months before applying again, so you have time to show improvement

A word about predatory offers

After a denial, you may receive offers for 'guaranteed approval' loans or credit cards with very high fees. Be careful. Some of these products charge fees that eat up most of your available credit before you even use the card. Read the full terms before you sign anything. If something promises guaranteed approval with no credit check, that is a signal to slow down and look closely at the cost.

The bottom line

Your adverse action notice is not just bad news. It is a road map. It shows you exactly where to focus your energy. Use the reason codes, pull your free report, fix any errors, and work on the issues one step at a time. Progress is possible, even if it takes a few months.