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If you’re familiar at all with public figures in the personal finance realm, you’ve likely heard of Dave Ramsey. He’s a radio host, author and motivational speaker with a Christian perspective, who teaches people how to beat debt and build wealth with his 7 Baby Steps. A few of his hallmarks: he’s anti-debt and pro-cash. He has a lot of great advice, but there’s one piece of his program that I really disagree with—and listening to it could potentially cost you a whole lot of money.
So, let’s first talk about his program. Dave Ramsey developed the Financial Peace University and if your financial prowess consists of simply collecting your paycheck and paying your bills, then it’s a beneficial program to get you more focused on your financial habits and future. My husband and I have been program leaders for our church and leading that small group was a rewarding experience that greatly benefited us.
FPU emphasizes Dave’s 7 Baby Steps which are:
As he walks you through the baby steps and how to mark each of them off your to-do list, he makes it abundantly clear that using cash is the only way to go. Credit cards be damned. He doesn’t want to hear about your airline miles or your cash back bonus rewards. It doesn’t matter if you pay them off every month and never pay finance charges. According to him, there are no good reasons to ever use a credit card.
As someone who enjoys doing a good bit of online shopping (where the bulk of my big purchase bargain hunting happens!), I wholeheartedly disagree for a number of reasons. Not only do my credit cards often offer me extra rewards for shopping online versus a brick and mortar store, but should my information get hacked, it’s easier to manage than if I had been using a debit card.
Related: Where You’ll Find the Most Cash Back
Have you ever had your credit card number compromised? I have, on more than one occasion. As soon as I noticed, I called the fraud department and they immediately flagged and credited those suspect purchases. I didn’t have to do a thing other than sign an affidavit that they were not my purchases. They mailed out a new card as soon as possible. They launched their investigation, made those credits permanent and the case was closed. The hardest part of the entire process is updating all of your automatic payments. Sometimes, they even recognize the fraud before I do and call to confirm so they can deny the purchase right at the register. Their detection capabilities are getting better all the time.
Now, have you ever had your debit card compromised? It’s a whole mess and often involves your account being frozen for a time and more work on your end to sort everything out. You take that immediate hit while you wait for the bank to do their investigation and reimburse your money, often taking 1-2 weeks before it’s returned. Meanwhile, the bills that were waiting to be paid with that missing money, still need paid.
Dave Ramsey has more than enough sitting around in other accounts to deal with the inconvenience of fraud should the unfortunate happen to him. Many of the rest of us though, don’t have that luxury. That’s why I never use my debit card for anything other than taking money out of the ATM. If it is never used outside of this purpose, it can’t be compromised by online hackers or unscrupulous waitresses or cashiers. Now obviously, my checking account information is still vulnerable as I do my banking online, but not using my debit card online or in retail stores diminishes my risk.
I’ve also managed to lose my purse before, which is never a pleasant feeling when the realization comes over you. Credit cards are so easy to cancel and replace, but cash is impossible to recover. Another reason that I’m not a fan of cash over credit.
Now, I advocate for credit cards because I am a person who manages them responsibly. I don’t charge more than I can pay off in any given month, and moreover, I budget to make sure I’m only charging what I should be spending. If there’s $500 in my monthly grocery budget, I don’t charge more than that even though cards give me that capability.
Someone who has overspent on cards before should not be in the habit of carrying a wallet full of cards. But maybe having one card that you only use for gas or that your cell phone bill gets applied to every month and paid off isn’t such a bad thing.
Why? Because you need a credit score. And establishing credit with a credit card is the easiest way to build a score. Dave Ramsey will argue that you don’t need a credit score and this is the one part of his advice that I think he gets wrong.
He argues that a credit score is simply a debt score and since he’s anti-debt, he’s anti-credit score too. That’s not only a simplistic view, but an arrogant one as someone who currently has a net worth of $55,000,000 and doesn’t need a credit score (though I would argue it’s still beneficial).
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You need a great credit score if you ever want to buy a house and must take out a mortgage—which is about 70% of the American population. Your credit score not only affects your ability to get a mortgage, but the interest rate that you’ll pay. This isn’t golf–a lower score is a bad thing and means you’ll pay a higher rate.
And no credit score–being “unscoreable” as is the case for someone who hasn’t utilized credit in 6 months or longer–can be as bad as a poor credit score, though you can fight your way through it. Securing a mortgage is not impossible, but it’s decidedly more difficult. You’ll have to be prepared with income verification spanning 1-2 years, and copies of paid utility bills, cell phone bills, and/or rent for the same time period. You may be required to put down a minimum of 20% and you need to make sure your loan payment to take-home income ratio doesn’t exceed 25%. And given that post-real-estate-bubble lending is tighter than a fat man in spandex, be prepared to fight an uphill battle.
Ready to leave mom’s basement for a penthouse apartment in the city? Just like banks, most landlords will check your credit report and be less likely to rent to someone without an established credit history. Not having a credit score means you’ll probably have to shell out more cash up front to prove you’re not a risky candidate. Your security deposit will likely be higher and you may be required to pay first and last month’s rent as well. And that’s if you don’t get passed over by a potential candidate who does have a great score.
Excited to wade into the world of fancy smartphones? You’ll need a credit score for that. Cell phone providers make their money on their plans and contracts so they’re not going to give you a phone and a plan if they don’t have confidence that you’ll pay the bill on time every month. You’ll likely have to pay a deposit or go prepaid to get a phone without a credit score.
Need to insure your home or a car? Well, your credit score is factored in to a “credit-based insurance score,” unless you live in California, Massachusetts or Hawaii where the practice has been outlawed. Your credit score is used to determine your likelihood of filing a claim and then determines your premium. A nonexistent credit history is more likely to result in a lower credit-based insurance score and a higher premium for your insurance. And who really wants to give the insurance company any more money than you have to? There is an exemption process you can go through, but it’s another hassle to deal with.
Applying for a new job? In 41 of the 50 states, your credit report can be pulled in consideration of employment. It’s a dwindling practice; only 48% of businesses still engage in it, but that’s still a 1 in 2 chance that your report could be pulled. While your score isn’t supposed to be viewable, they can view the rest of your credit history and deem your worthiness for a job. They need your written permission, but your refusal may look just as suspicious and leave you with some explaining to do. Jobs are hard enough to come by; should the lack of a credit history really be the thing that gets your application placed in the reject pile?
There’s a work-around for all the above scenarios, so getting by without a credit history is certainly possible. But it’s not easy. There’s usually a few, and sometimes a lot, of hurdles to jump through. Is it really worth the hassle and the risk of not getting what you want or paying more for it? Especially when you consider a good credit score can be achieved by simply placing your monthly gas purchases on a gas rewards card and paying them off in full at the end of the month. You get a great score while earning a few dollars back and you’re not going into debt or overspending in the process. So tell me Dave Ramsey, how is that not a win-win?
What do you think—is Dave Ramsey right? Does a credit score really not matter? Do you keep tabs on your credit score? Talk to me in the comments!