What Is an Adverse Action Notice?

Ben Luthi

Being denied credit is never good news. But thanks to federal law, you don't have to wonder why you were denied or what you can do to improve your odds of approval the next time you apply.

If you have been turned down for credit, work, insurance or housing because of information in your credit report, you will receive what's called an adverse action notice. This is a requirement of the Fair Credit Reporting Act. Other situations also may call for an adverse action notice.

This notice, which can come as a letter, an email or a phone call, provides information that can help you understand why you were turned down and what to do next. An adverse action notice can give you insight into your credit and prompt you to improve it.

[Read: Best Credit Cards for Bad Credit.]

When Do You Get an Adverse Action Notice?

If you've been denied credit, there is no specified time frame for when you'll receive an adverse action notice. In general, creditors often make contact within seven to 10 days of a decision.

If you are approved for credit but don't receive the terms you ask for, you will also get an adverse action notice. The timing depends on your situation and whether you have applied for:

-- Closed-end credit. If it's a loan or other form of closed-end credit that must be paid back by a specific date, the lender must provide the notice before you sign the loan documents.

-- Open-end credit. If it's a revolving line of credit that you can use repeatedly up to a certain limit (think credit cards), the lender must send the notice before you receive your credit card. The exception is a store credit card opened at a cash register. The creditor must provide the notice within 30 days of authorizing credit or with its first mailing after approving the application, whichever occurs first.

-- Account reviews. If the interest rate increases on your credit account, the creditor must notify you upon that decision or within five days of the effective date, depending on the situation.

You may receive an adverse action notice in other situations as well. It can happen if you've had credit revoked, if you weren't approved for the amount of credit you requested, or if a creditor makes any other negative changes to your account based on an unfavorable review of your credit report.

The exception: If you ask for a credit limit increase on an account and your request is denied, that is not considered to be an adverse action.

What Can You Expect From an Adverse Action Notice?

An adverse action notice must include the following information:

-- Your credit score, if it was used in the decision.

-- Reason or reasons for the adverse action.

-- Name, address and phone number of the credit bureau that supplied the report used in the decision.

-- Notice of your right to a free copy of your credit report from the credit bureau within 60 days.

-- Notice of your right to dispute the accuracy or integrity of any information the credit bureau provided for the decision.

"The adverse action notice provides information you can use to improve your credit or take other steps to help ensure you will qualify the next time you apply," says Rod Griffin, director of public education for the credit bureau Experian.

Keep in mind that the credit bureau isn't the one that made the credit decision, though. If you have questions about the reasons listed in the adverse action notice, you will need to speak with the creditor or business that sent it.

[Read: Best Credit Cards for Fair Credit.]

What Should You Do if You Receive an Adverse Action Notice?

An adverse action letter has an upside. Depending on the information you find, it can provide some next steps.

"No one wants to get an adverse action notice," Griffin says. "But if you do, take a breath, and then use it as a tool to help improve your creditworthiness. The information can help you create a road map for ensuring your application is not declined in the future."

Here's what you can do when you receive the notice:

Pinpoint areas to improve

By providing the factors that affected a credit decision, the lender or business tells you exactly what you need to focus on. But your credit report can tell you even more. You have 60 days to order a free credit report under federal law, so act quickly.

Read your report to note areas where you can improve. You could set a goal to catch up on late payments, pay off collection accounts, or pay down high credit card balances, if your credit report reveals those areas need improvement.

Certain challenges may require patience.

Mike Pearson, founder and managing editor of Credit Takeoff, a credit education website, says, "If you were denied because there were too many recent hard inquiries on your credit report, which may signal to lenders that you're under financial duress, then your only option is to wait it out."

The same advice applies to bankruptcy or foreclosure. You might need to wait for mistakes to fall off your credit report.

Dispute inaccuracies. An unexpected credit denial could alert you to fraudulent accounts or inaccurate data reported to the three major credit bureaus.

Review your credit report for potentially erroneous or fraudulent information using the Consumer Financial Protection Bureau's guidelines, especially if any of the reasons in your adverse action notice sound off. If you find an item you don't recognize in your report, contact the creditor or file a dispute directly with the credit bureau.

The credit bureau can take 30 to 45 days to investigate a dispute and then five days after that to send you a written notice of its findings.

Work with a different lender. If you're seeking a loan or credit card, applying with a different lender may solve your problem. Each lender has its own criteria for account approval, and some lenders will work with borrowers who have less-than-perfect credit.

That said, working with a different lender could result in getting less favorable terms than the original loan or credit card you applied for. But if you need the funds and have the means to make the payments, it can be worth it. And if you can improve your credit in the future, you may qualify for better terms.

Apply for a different product. If you were denied a loan or credit card, you may be approved for a different product, even with the same lender.

Maybe you applied for an unsecured personal loan and were turned down, but you would have better luck getting a secured personal loan.

If you were denied a credit card designed for a stronger credit profile than yours, then you may only need to research and apply for a card better suited to your credit score.

[Read: Best Secured Credit Cards.]

How Can You Reduce the Chance of Denial?

Rejection can happen to anyone, but avoiding it to begin with is best.

Whether you're getting a loan or credit card, know the eligibility criteria before you apply. Not all lenders reveal minimum credit scores and other requirements. But if you call, you may get enough information to decide whether you're in the ballpark.

There's no surefire way to make sure you get approved for every loan or credit card you apply for. But this type of preparation can help reduce the chance that you'll apply for credit you never had a chance to get in the first place.