Credit report

A credit report is a document that primarily lists current and past financial obligations and shows the credit score assigned to the consumer by the three credit reporting agencies (Equifax, TransUnion, and Experian). This report may also contain other useful information such as name, address, and Social Security number verification, late payment reports, legal collections, bankruptcies, and child support payments in the event of a divorce, among other things.

The financial system relies heavily on these reports, and particularly on credit scores, when granting loans and determining the interest rate appropriate for a given risk profile. Therefore, it's important to understand the main factors that reporting agencies consider when calculating credit scores. In order of importance, these are the factors:

• Payment history: The most important factor of all is making payments on time. Just one late payment of 30 days can significantly affect your credit. An account sent to collections, foreclosure, or bankruptcy can have a long-term impact on your credit.

• Credit utilization ratio: The amount owed, as well as the percentage of revolving credit being used, is another factor that affects your credit score. Accounts considered in the utilization ratio are specifically credit cards and mortgage lines of credit. Taking action in this area can have a rapid impact on your score. For example, lowering credit card balances can increase your score once the creditors report the new balance to the credit bureaus. Keeping the utilization ratio below 30% is advisable, although higher scores are achieved with utilization below 10%. To calculate utilization, divide the outstanding balance by the total credit limit of the credit card or line of credit. It's important to note that the total amount owed is also divided by the combined credit limit of all credit cards and lines of credit. This is why canceling credit cards is not recommended, as it would reduce the total available credit and therefore increase the utilization ratio.

• Credit history duration: The age of open accounts—the oldest, the newest, and the average age of accounts—indicates the consumer's experience managing credit. Therefore, account age is another factor that determines credit score.

• Credit portfolio mix: Demonstrating the ability to manage different types of credit effectively is another factor. A mix of term loans (such as auto, personal, student, and mortgage loans) and revolving credit (credit cards and lines of credit) will be favored in the credit score calculation.

• New Credit: Since acquiring new credit increases the likelihood of falling behind on payments for older accounts, your credit score can be affected each time a lender requests a credit report (hard inquiries) as part of a new loan application. It's important to note that comparing different lenders to find the best terms, such as a lower interest rate, is viewed favorably by credit bureaus. Therefore, within a 15- to 30-day period, multiple credit report requests for the same type of loan from different lenders will be counted as a single request. This applies only to term loans, such as personal, student, auto, and mortgage loans. For credit cards, each request will be counted individually.