Why Is a Good Credit Score Important and What Does it Affect?

When you use credit, the issuer of that credit will report information about your account to the credit bureau. Bureaus keep a database of financial data on each credit consumer, and this information is used to create your individual credit report. As a consumer, it's wise to understand why having good credit is important and how it affects your financial life.

Identification

According to MyFico, your FICO score is based upon your credit report information and is comprised of five distinct factors. Thirty-five percent of the score reflects how well you pay your bills, 30 percent is based on how much debt you have, 15 percent is the average length of your credit score, 10 percent of the score reflects the mix of credit types that you have, and the last 10 percent is based on the amount of new credit that you've applied for lately.

Significance

The FICO score ranges from a low of 300 to a high of 850. The higher your score, the better your credit. What number constitutes good credit varies from lender to lender; however, according to Bankrate, a good credit score is above 700. A high credit score can open financial doors for you, resulting in lower interest rates, access to more employment opportunities, zero percent interest on credit cards, approvals for home or car loans, and lower insurance rates.

Considerations

The largest single factor of your FICO credit score is your payment history. To maintain or achieve a good credit score, you must pay your bills on time. According to Bankrate, one single 30-day late payment can drop your score by as much as 110 points. Charge-offs, repossessions, judgments, bankruptcy and other derogatory payment events will lower your score as well. Negative account history remains on your report for up to seven years and bankruptcy can remain for up to 10 years.

Prevention/Solution

Know what's in your credit report. The Fair and Accurate Credit Transactions Act gives consumers the right to receive one free credit report each year from each of the three bureaus: TransUnion, Equifax and Experian. To comply with FACTA, the bureaus created the Annual Credit Report website -- annualcreditreport.com -- that allows you to order all three reports in one place. If you find any errors, you have the right under the Fair Credit Reporting Act to dispute that mistake with the bureaus and have it corrected or removed. You can file a dispute at the bureau's website, or by phone or mail using the address or phone number found on the bureau's website or on your credit report. Bureaus have up to 30 days to complete the investigation of your dispute then notify you of the results.