Understanding Adverse Action Letters and How to Improve Your Credit

Receiving an adverse action letter can be a daunting experience, but it’s important to understand what it means and how you can respond effectively. At O1ne Mortgage, we are committed to helping you navigate through these challenges and improve your credit standing. If you have any mortgage service needs, feel free to call us at 213-732-3074. Our team is here to assist you every step of the way.

What Is an Adverse Action Letter?

An adverse action letter is a formal notice indicating that you have been denied credit, employment, or an insurance policy. This letter provides crucial information about the reasons for the denial and offers resources to help you understand your next steps. Under the Fair Credit Reporting Act and the Equal Credit Opportunity Act, organizations are required to inform you why you were denied based on your credit report.

What Is Included in an Adverse Action Letter?

Regardless of the format—oral, electronic, or written—an adverse action letter must include specific information:

• Your credit score, if it was used in the decision, along with the date it was created and the range of possible scores.
• The name, address, and phone number of the credit reporting agency that provided the credit report.
• Reasons for the denial, which can be up to five.
• Notice of your right to a free copy of your credit report within 60 days and instructions on how to obtain it.
• Notice of your right to dispute the accuracy or completeness of any information provided by the credit reporting agency.

This information helps you understand your credit history and identify areas that need improvement.

Why Did I Receive an Adverse Action Notice?

There are several reasons why you might receive an adverse action notice, including:

• Your credit score doesn’t meet the creditor’s minimum requirement.
• You have too much debt relative to your income.
• You lack sufficient credit history.
• You have late payments on your record.
• You have too many recent credit applications.
• Your credit utilization ratio is high.
• You have too much existing credit with the lender.
• You have a bankruptcy, short sale, or foreclosure on your record.
• You have charge-off or collection accounts.

Companies are required to list four key factors affecting your credit score. If the number of hard inquiries is one of the factors, they must include five factors.

How to Respond to an Adverse Action Letter

While you don’t necessarily need to respond to an adverse action letter, you can reach out to the company if you believe your situation deserves context. For instance, if you find debt or derogatory marks you don’t recognize, you can explain the situation and indicate your intention to dispute the information with the credit bureaus. If you applied for a mortgage loan, you might be able to pay down some debts and request a rapid rescore.

Next Steps After Receiving an Adverse Action Notice

Whether or not you ask the company to reconsider, here are some steps you can take to improve your credit situation:

1. Review the Reasons for Denial

Understanding why you were denied can help you determine your next steps. For example, if it’s due to a high credit utilization rate, work on paying down high credit card balances. If you have too many recent credit inquiries, wait a few months before applying for credit again.

2. Understand Which Factors Affect Your Credit Score

The primary factors influencing your FICO® Score include:

• Payment history
• Amounts owed
• Length of credit history
• Credit mix
• New credit

Check your FICO® Score to see where you stand and consider areas for improvement within these categories.

3. Review Your Credit Report

While your credit score offers a snapshot of your overall credit health, your credit reports provide the source data for your score. Obtain a free copy of your Experian credit report and visit AnnualCreditReport.com for free copies of your TransUnion and Equifax reports. Review these reports for any negative information and make a plan to address it.

4. Dispute Inaccurate Information

If you find inaccurate or fraudulent information on your credit report, you have the right to file a dispute with the credit reporting agencies. Once you submit your dispute, the credit bureau will investigate and resolve the issue, typically within 30 days. The outcome could be a correction, update, or verification of the information.

5. Wait to Apply Again

It can take time for your efforts to reflect in your credit reports and score. Monitor your credit to determine the right time to submit another application.

How to Improve Your Credit

Based on the reasons for denial in your adverse action letter, prioritize steps to address specific issues. Here are additional actions to build your credit score:

• Pay your bills on time. If you’re behind on payments, get current as quickly as possible and aim to pay on time every month.
• Pay down credit cards. Keep your card balances below 30% of your available credit, but the lower, the better.
• Avoid unnecessary credit applications. Multiple credit inquiries in a short period can have a compounding effect on your score.
• Get credit for other payments. Experian Boost® can potentially improve your score by adding rent, utilities, phone, insurance, and streaming service payments to your Experian credit file.
• Get added as an authorized user. If a family member with good credit adds you as an authorized user on their credit card, the account’s history will be added to your credit reports, potentially improving your score.

Consider Other Options in the Meantime

While improving your credit is important, you may still need credit in the meantime. Some lenders specialize in working with people who have less-than-stellar credit. While their terms may not be as favorable, they can provide the credit you need. Consider these options only if you absolutely need credit now and can’t wait to improve your credit situation.

At O1ne Mortgage, we understand the challenges of navigating credit issues and are here to help. For any mortgage service needs, call us at 213-732-3074. Our team is dedicated to providing you with the best possible service and support.