The all-important credit score regularly provokes outrage or glee among consumers as they attempt to borrow money. If you’d like more joy when it comes to that process, certified financial planner Orlando Batturaro wants to help you get it.
He will be teaching a seminar on credit at 11:30 a.m. Oct. 22 at the West Sacramento City Hall, 1110 W. Capitol Ave. His session will be part of Greater Sacramento Financial Planning Day, and to fully partake in that event, participants will want to arrive as early as 8:30 a.m. to register. Batturaro, who is based in Sacramento, recommends that his class participants arrive early enough to attend certified financial planner Greg Glunt’s budgeting presentation at 10:30 a.m.
“I will be piggybacking off the budgeting exercises, which are clearly going to be about spending less than what you make, spending within your means and how that creates wealth,” said Batturaro, president of the Financial Planning Association of Northern California. “When you borrow (money), you potentially have taken away from that wealth, so the next phase in budgeting is when it’s appropriate to borrow and when you should borrow.”
The event features classes and free one-on-one consultations with dozens of financial planners, who review everything from 401(k) investments to life insurance to income taxes.
The way individuals create wealth, Butturaro said, is they keep more of what they earn every single month, so their income is basically an asset-building tool if they use it correctly. If someone takes home $3,000 in income every month, after paying taxes and everything, spends $2,000 of that and puts $1,000 away, that person has created $1,000 of net worth or $1,000 of wealth, Batturaro said.
But, he said, some people will take home that same income and spend $3,500 in a given month. They borrow $500 to buy a TV or clothes or something else they wanted, and after that month, they’re negative. Instead of creating wealth, they’ve taken away from their wealth.
“If I’m borrowing for something that is later going to produce income or is later going to become an asset,” Batturaro told me, “maybe that’s not such a bad idea, especially if I can borrow at a low rate, especially like those today. But when you’re borrowing for normal expenses or things that will go down in value, then you’re definitely putting a negative number next to your net worth.”
Sometimes, though, borrowing makes sense, Batturaro said. Let’s say someone is buying a house. If that person can buy a house with a 3 percent rate and the house is going to go up in value by 5 percent a year, then that might not be a bad investment.
Batturaro will explain how to evaluate credit decisions, how every action taken by a debtor affects a credit report and how those actions are weighted to come up with the FICO credit score. That FICO acronym, by the way, comes from the Fair Isaac Corp., the company that makes the software used to calculate credit scores. Batturaro said his goal isn’t to defend the FICO score process or the companies that use it.
Rather, Batturaro said, he has seen the frustration of clients who shunned debt and managed their money responsibly but then find that they either have no credit scores or who feel that their scores don’t reflect their actual credit-worthiness. And, he said, he has also had clients, friends and family who were in the middle of trying to buy a home when a lender finds something on their credit report that is inaccurate and that stalls a time-sensitive process.
A credit score is not a measure of you financially, Batturaro said. A credit score is not a reflection of whether you’re a good manager of your own personal assets. A credit score merely reflects how you have managed debt in the past, and if consumers don’t have that history or have a lengthy history, that could lower their scores.
Scores range from a low of 300 to a high of 850, Batturaro said. The biggest component of the credit score is payment history, he said, noting that 35 percent of the score is based on that. Some people think their score will improve if they pay off their credit cards immediately every month. While it’s a good practice because it allows people to avoid paying interest, Batturaro said, lenders don’t get a sense of how a consumer will manage if circumstances force them to carry payments long-term.
Thirty percent of the credit score is determined by how much debt the consumer carries and the length of their credit history, Batturaro said, while new credit is 10 percent and credit mix is 10 percent. While some consumers get cranky because they think their score should be 800 or more, Batturaro cautioned that perfection isn’t necessary. The green range on a FICO is a little bit under 700, he said, so 675 all the way to 850 can mean getting a better interest rate.
“I don’t have an 850 (FICO score), and that probably has to do with the fact that I personally don’t borrow a lot of money and I don’t carry a lot of debt on credit,” Batturaro said. “Now, when I’ve gone to buy a car and they have zero-percent financing on approved credit, I’ve always gotten it. … If you’re within the green range, you’re going to qualify. If it’s zero-percent financing on a car, you don’t have to have an 850 to get that, nobody would get it if that was true.”
He recommended that consumers get a copy of their credit report annually. Each of the three national credit bureaus – Equifax, Experian and TransUnion – is obligated to provide one report to consumers annually for free. Some financial gurus suggest laddering the reports – that is, going to one credit bureau a year over three years – to avoid paying a fee. Reports can be ordered at annualcreditreport.com, where consumers will have to provide Social Security numbers and other identifying information before they can access their information.
Know what’s on your report before you apply for credit, Batturaro said, and address any errors immediately with the company reporting the information.