If you've ever been turned down for credit, had a job application rejected, or applied for insurance and been denied because of information on your credit report, or in some cases your criminal record, then you've experienced an "adverse action." Whether you've experienced an adverse action or not, it's a good idea to understand what it means, and also understand your legal rights.
Let's take a closer look at the specifics of adverse action, your rights, and the obligations of those making decisions based on these things.
Adverse action defined
In short, it's an action that denies a person -- or business in some cases -- employment, credit, insurance, or some other benefit, due to consumer, credit, or criminal history. In some cases, an adverse action can include termination of employment, denial of promotion, or some other loss of existing benefit.
If a potential creditor or employer is using either your criminal or credit history, they must have explicitly notified you -- and you authorized -- that this information would be used in the decision process. In many cases, it is completely legal for a potential employer or creditor to require that you authorize a review of your criminal and consumer history before you will be considered for credit or employment.
Depending on whether it was a credit- or employment-related action, there are different timelines that govern how soon you must be notified. The two primary federal laws are the Equal Credit Opportunity Act, which "prohibits credit discrimination on the basis of race, color, religion, national origin, sex, marital status, age, or because you get public assistance," and the Fair Credit Reporting Act, which is key for giving consumers access to the information used in these decisions.
In short, the Equal Credit Opportunity Act prevents lenders, or those involved in the credit-decision process, from using the things listed above as factors in your credit decision, or the terms or conditions they assign. The Fair Credit Reporting Act, on the other hand, is intended to both ensure accuracy and consistency in credit reporting, as well as to give consumers easier access to their credit reports, among other things not related to this topic.
A few of your key rights
If a creditor or potential employer denies you because of information on your credit, consumer, or criminal history, it's defined as an "adverse action," in which case they are legally required to do a few things:
- Provide notice -- usually written, but sometimes oral -- that adverse action has been taken either in whole or in part due to information from a reporting agency.
- Provide contact information to the agency that provided the report so that you can access (at no charge) the information that was used in the decision.
- Do so within the legal time limits, which can vary based on state and federal laws.
They are also required to make it clear that they made the decision, not the reporting agency, which only provides the report used in the decision.
Avoiding adverse actions
The two most important steps to avoiding adverse actions are simple. First, avoid negative actions, such as late or missed payments, defaulting on credit accounts, DUI convictions, and other "dumb" actions that you can prevent.
Next, review your consumer history -- from all three major reporting bureaus -- at least once per year for accuracy. If you already have negative information, there's not much you can do about that, except avoid making those mistakes again, and let time help clean up your history.
Eventually, a track record of positive information should help reduce the impact of the negative, and reduce your exposure to adverse actions in the future.
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