Having adverse action taken against you can definitely impact your credit score. Adverse action refers to a lender denying you credit, approving you for credit on less favorable terms, or terminating your existing credit. This type of action is usually the result of a negative item on your credit report or a low credit score.
How does adverse action appear on your credit report?
When a lender takes adverse action against you, they are legally required to send you an adverse action notice explaining why you were denied credit or approved on less favorable terms. This notice must include the name, address, and phone number of the consumer reporting agency that supplied the information that influenced the lender’s decision.
The consumer reporting agency will then add a statement to your credit report indicating that adverse action was taken against you. This typically takes the form of a “key factor code” that shows potential lenders you’ve had credit denied or discontinued. Some key factor codes you may see include:
- Code 1 – Delinquent payment
- Code 2 – Derogatory public record or collection filed
- Code 3 – Your credit obligation was discharged through bankruptcy
- Code 4 – Number of recent inquiries on your report
- Code 5 – Number of accounts with delinquency
- Code 6 – Value and/or type of collateral not sufficient
- Code 7 – Length of time accounts have been established
- Code 8 – Lack of credit references or no credit file
- Code 9 – Unable to verify credit references
The key factor code will stay on your report for up to 24 months. This lets other lenders know you’ve had credit trouble recently.
How does the adverse action affect your credit score?
The adverse action itself doesn’t directly lower your credit score. Your score drops because of whatever negative factor led the lender to take adverse action in the first place. For example:
- If you were denied because of late payments, those late payments caused your score to go down.
- If you were denied because of too many credit inquiries, each of those inquiries caused a small drop in your score.
- If you were denied because of a past bankruptcy or collections account, those derogatory marks lowered your score.
So the adverse action is just a consequence of your lower score, not the cause. However, now that it’s on your report, that key factor code may make other lenders more hesitant to approve you, further worsening your situation.
How much could adverse action drop your credit score?
It depends on your starting score and the reasons behind the adverse action. If you had great credit (a score of 740 or higher) before being denied, the adverse action itself may only cause your score to drop a few points. But if you were already on shaky ground credit-wise before being denied, it could drop your score significantly more.
For example, here’s how much your score might drop if you start with Good credit (660 to 739) and experience adverse action due to:
- 30 day late payment: 50 to 110 points
- Foreclosure process started: 85 to 160 points
- Debt in collections: 95 to 175 points
- Maxed out credit cards: 10 to 45 points
As you can see, the lower your starting score and the more serious the credit mishap, the more potential damage to your score.
How long does the credit score impact last?
Again this depends on why the adverse action occurred. The key factor code announcing the adverse action will remain for up to 24 months. Meanwhile, any negative item that caused your score drop in the first place will typically stay on your report having a negative impact for between 7 years (for late payments) up to 10 years (for bankruptcies and foreclosures).
Some good news is that as negative items age, they have less of an impact on your credit scores. For example, a collection that’s 5 years old hurts your score much less than one that’s 5 months old.
How can you recover from adverse action?
Here are some tips to help your credit recover after facing adverse action:
- Pay down balances: If high credit utilization hurt your score, start paying down balances to reduce utilization. Get below 30% if possible.
- Dispute errors: If any of the negatives are incorrect or outdated, file disputes to get them corrected or removed.
- Become an authorized user: Ask a friend or family member with good credit to add you as an authorized user on a credit card. This can give your score a boost.
- Go secured: Apply for a secured credit card and use it responsibly to start rebuilding your score.
- Ask for goodwill adjustments: Request credit issuers remove late payments or waive annual fees to help your score.
With time and work, you can eventually recover from the credit score damage caused by adverse action. Be patient, stick to responsible habits, and your scores will start to improve.
Conclusion
Having adverse action taken against you can negatively impact your credit, especially if your scores were marginal to begin with. The adverse action causes a “key factor code” to be added to your credit report alerting other lenders you’ve been denied credit. This code remains for up to 24 months.
More importantly, whatever issue led the lender to deny you is what caused your credit score to decrease – whether it was late payments, too many inquiries, or a past bankruptcy. Your credit score likely dropped significantly as a result.
Recovering from adverse action takes time as you rebuild credit and wait for negative marks to age off your reports. But by staying diligent, keeping balances low, and disputing any errors, you can get your credit back on track.
Summary in a Table
| How Adverse Action Impacts Credit Score |
|---|
| Causes “key factor code” on credit report |
| Stays on report up to 24 months |
| Alerts lenders you were recently denied credit |
| Score drops due to negative factor behind adverse action |
| Drop amount depends on starting score and reason for denial |
| Late payments cause 50-110 point drop typically |
| Foreclosure start sees 85-160 point drop usually |
| Collection accounts mean 95-175 point drop on average |
| Maxed out cards can mean a 10-45 point decrease |
| Negative marks impact score for 7-10 years depending on type |
| Recover by paying down balances, disputing errors, adding authorized user accounts, getting secured card |