What is a Credit Report?

A credit report is a document that primarily lists current and past financial obligations and displays the credit score assigned to a consumer by the three major reporting agencies (Equifax, TransUnion, and Experian). This report also contains other vital information, such as verification of name, address, and Social Security number, as well as records of late payments, collections, bankruptcies, or child support obligations resulting from a divorce, among others.

The financial system relies heavily on these reports—and specifically on the credit score—when granting loans and determining the interest rate that corresponds to a specific risk profile. Therefore, it is essential to understand the primary factors that reporting agencies consider when calculating your score. In order of importance, these factors are:

Payment History

The most critical factor of all is making payments on time. A single 30-day late payment can significantly damage your credit. Accounts sent to collections, foreclosures, or bankruptcies can have a long-term negative impact on your creditworthiness.

Credit Utilization Ratio

The amounts owed and the percentage of revolving credit being used is another major factor influencing your score. Accounts factored into this utilization percentage specifically include credit cards and Home Equity Lines of Credit (HELOCs).

Taking action in this area can lead to rapid improvements in your score. For example, paying down credit card balances can increase your score as soon as the creditors report the new balance to the bureaus. While it is advisable to keep utilization below 30%, the highest scores are achieved with utilization below 10%.

• How it's calculated: Divide the outstanding balance by the total credit limit of the card or line of credit.

• Expert Tip: The bureaus analyze both individual account utilization and aggregate utilization (total debt across all accounts vs. total combined limits). This is why it is generally advised not to close old credit cards, as doing so reduces your total available credit and increases your utilization percentage.

  
  

Length of Credit History

The age of your accounts—including the oldest account, the newest account, and the average age of all accounts—provides a signal regarding the consumer's experience in managing debt. Consequently, the longevity of your credit file is a key determinant of your score.

Credit Mix

Demonstrating that you can successfully manage different types of credit is another factor. A healthy mix of installment loans (such as auto, personal, student, and mortgage loans) and revolving credit (credit cards and lines of credit) is viewed favorably in the score calculation.

New Credit

Because acquiring new debt increases the statistical probability that a consumer might fall behind on older accounts, your score may be affected whenever a financial institution performs a hard inquiry during a credit application.

It is important to note that "rate shopping"—comparing terms across different institutions to find the best interest rate—is recognized as a positive consumer behavior by credit bureaus. Because of this, multiple credit inquiries for the same type of loan within a 15 to 30-day window are treated as a single inquiry.

Note: This "shopping window" only applies to installment debt (mortgages, auto, student, and personal loans). In the case of credit cards, every application is counted individually.