Adverse Actions That Credit Card Issuers Can Take

John Ganotis

John Ganotis

Updated Sep 13, 2016

What is an Adverse Action?

An adverse action is any negative action that a credit card issuer can take against you. They occur in response to a review of your credit report or score.

The most common types of adverse actions are denials of credit, credit limit reductions, and interest rate increases.

If you’re applying for a card and your credit doesn’t meet the standards of the issuer, you may get a denial of credit instead of being approved. Or, if you already have an account and the issuer sees that your credit has degraded, they may decide to reduce your credit limit or increase your interest rates.

What Does an Adverse Action Include?

If a credit report or a credit score was used as the basis for the adverse action, the card issuer is required by law to provide you with a notice. That notice can be delivered verbally, by email, or in writing. Most adverse action notices are sent via the mail.

All adverse action notices must contain:

  • the credit score that was used as a basis for the lender’s negative action
  • the credit reporting agency from where your credit report was pulled
  • contact information for the credit reporting agency

The purpose for the contact information is so you can contact the credit reporting agency and request a free copy of the credit report that was used by the lender, which is your right under the Fair Credit Reporting Act.

Since July 2011 all adverse action letters, also referred to as declination letters, have had to include your credit score if it was used as a basis for the lender’s decision. The disclosure of your scores is proactive, meaning you don’t have to ask for the lender to provide you with your credit score.

Insider Tip: Check out our resources on how to use a credit card responsibly

Forms of Adverse Action

Denial of Credit

A denial of credit is probably the easiest type of adverse action for most consumers to understand. It’s no secret that credit card issuers rely heavily on credit reports and scores to guide the decision process whenever you fill out a credit card application.

If your credit meets the card issuer’s minimum qualification standards at the time of your application then you will likely be approved for a new account. However, if your credit does not satisfy those minimum standards then you will be denied and an adverse action letter will be mailed to you explaining the reason(s) for your denial.

Insider Tip: You can use prequalified credit card offers to check if you’ll be approved for a card before you apply,

Less Favorable Terms

When you apply for a new credit card account the potential results of your application are not just approval or denial. There is a third option known as an “adverse approval.” Essentially an adverse approval is a counteroffer a lender may make if your credit is not strong enough to qualify for a new account at the terms requested. You might, for example, apply for a credit card with no annual fee, a 0% introductory interest rate, and 10.99% APR thereafter.

Yet upon review of your credit score/report the card issuer might offer you a card with a $99 annual fee, without a special introductory rate, and with a 14.99% APR instead. Of course you would be free to accept or decline the card issuer’s counteroffer and, should you decline the offer, the card issuer would be required to mail you an adverse action letter.

Insider Tip: Credit limits too low? Learn how you can increase your credit limits.

Negative Change in Account Terms

Adverse actions can be taken against existing account holders as well. Many consumers are surprised to learn that their credit card issuers will continue to monitor their credit reports and scores periodically, perhaps even as often as once per month.

These routine credit checks are commonly referred to as “account maintenance.” The purpose behind account maintenance is to help card issuers ensure that the creditworthiness of their current customers has not changed since their initial applications.

If you have credit problems, even with an unrelated lender, then your card issuer may take steps to reduce their exposure to your elevating risk. Therefore if your credit scores drop, your credit card issuer might reduce your credit limit or increase your interest rate for future purchases.

You’ll have the option to opt-out of this change, but that means that you’ll need to close your credit card account. You’ll then have a specified period of time to finish paying off the balance. If you use the card after the interest rate is increased, that indicates that you’re accepting the new terms.

Note: Retroactive rate increases on an existing balance are only allowed if you become severely delinquent on that specific credit card account.

Additionally, if your credit score drops significantly then your card issuer could even decide to suspend your account entirely. Generally, all that a card issuer needs to do in order to legally implement any of the adverse actions mentioned above is to send you a notice in the mail 45 days prior to changing the terms of your account.

Universal Default

“Is it true that my credit card company can increase the interest rate on my existing credit card because I missed payments on an account with a different lender?”

The practice of raising the rate or changing the terms on a credit card account due a cardholder missing payments on an unrelated account is referred to as “Universal Default.” Prior to the Credit Card Accountability, Responsibility, and Disclosure Act of 2009 – aka the CARD Act – universal default was a much more common occurrence.

In fact, prior to the CARD Act, if a credit card issuer observed a drop in your credit scores or if late payments to an unrelated lender showed up on your credit reports, the card issuer would commonly increase your interest rate to the “default” rate and ON YOUR EXISTING BALANCE.

Since the default interest rate usually hovers near 30%, you can imagine what an upsetting practice this was for consumers. The CARD Act did put limitations on lenders regarding the practice of universal default; however, you would be incorrect if you believe that the practice has been outlawed completely.

Before the passage of the CARD Act credit card issuers were allowed to pull copies of your credit reports and credit scores as often as they wished. Pulling copies of your credit reports is how credit card issuers would detect if you fell behind on your payments with another lender.

The CARD Act did not do away with the practice of credit card issuers pulling the credit reports of their customers. In fact, some credit card issuers will review your credit reports and scores every single month in order to see if your level of credit risk has changed.

If your scores have dropped, you can likely expect there to be negative consequences. One of the most upsetting side effects of pre-CARD Act universal default practices was the retroactive rate increase. Retroactive rate increases occur when a credit card issuer increases the interest rate on your current credit card balance or, in other words, on purchases made prior to the rate increase.

The CARD Act did not completely eliminate the practice of retroactive rate increases, but it did impose much stricter limitations. Currently, a credit card issuer may only impose a retroactive rate increase when a cardholder misses payments with the card issuer directly.

Even though retroactive rate increases can no longer be triggered due to delinquent payment activity on an unrelated account, other adverse actions are still allowed. If you fall behind on payments on an unrelated account your card issuer could still close your account, lower your credit limit, or increase your interest rate on future purchases.

Insider Tip: Don’t let adverse actions happen to you: always follow the principles of responsible credit use.
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