Radio host and debt-free advocate, Dave Ramsey, appeared on CBS’s The Early Show last week and offered some unusual advice. Ramsey recommends not using debt at all, paying for everything with cash and ignoring your credit score. According to the transcript:
"Ramsey calls the FICO score an "I love debt score." In other words, he says you cannot have a high score unless you carry debt."
This is not exactly true. Even if you have just a couple of credit cards that you use on a regular basis, you can have a high credit score. Carrying small balances on these cards and having loans on your credit report can help your score, but aren’t a necessary requirement to good credit. Plus, if you have good credit cards with no annual fees and pay the balance in full each month, you can avoid the costs of "carrying debt" altogether.
Ramsey goes on to advise people to apply for mortgages with lenders who don’t require credit checks and to accept paying more for their car insurance because they have low credit scores. While Ramsey’s advice about limiting your debt and increasing your savings is excellent, it doesn’t make sense to exclude your credit from this equation.
Moderation is key. Having 2-3 open credit cards that you use regularly and responsibly will help you have a good credit scores. Good credit scores will make it easier for you to obtain loans, car insurance, apartments and jobs. Plus, having access to credit cards can be very helpful in an emergency or when you are faced with unexpected costs.
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While your post seems true, it isn’t. Of course, I’m not a ‘moderation’ advocate. The use of credit, or better yet other people’s money, is not responsible behavior. Your closing sentence sums it up nicely, and is riddled with naivety.
Firstly, if one does not borrow money, a FICO score is useless. We pay cash for everything. Why would I ‘need’ a good credit score?
And, this idea that Dave Ramsey suggests you pay more for insurance is inaccurate. He recommends a higher deductible to reduce your monthly premium. Which is great. But, this is irresponsible without a proper emergency fund. Although, for health insurance, we were able to reduce our premiums this way by increasing our deductible and opening an HSA to cover the other costs. This way, you have more control over where your money goes. And HSA’s can be rolled over into IRA’s and mutual funds.
Lastly, credit cards are not an emergency fund. If you listen to Dave Ramsey, his first baby step toward eliminating debt is to start an emergency fund so that those pesky credit cards aren’t needed thereby allowing you to reduce and ultimately eliminate debt. We have an emergency fund, for those ‘unexpected costs’ you mentioned, and no credit cards.
Thanks for your comments Emma! I’m glad to hear that being “credit-free” works for you.
However, most people can’t afford to pay cash for everything they purchase. Especially out here in San Francisco, where the average home costs $700,000. If a mortgage or car loan is in the future, it makes sense to have at least one or two credit cards helping boost your credit score. Without a credit score, you’ll probably have to pay higher rates for loans, insurance, utilities, cell phones and more.
As long as you don’t carry over any credit card balances from month to month, you aren’t paying for the privilege of using credit. It’s possible to beat the system and benefit from using credit.
Thanks for reading CreditBloggers.com. I hope you’ll come back and comment again soon!
Thanks Emily. I see what you’re saying. Heck, I grew up in Orange County, California so I know what you’re talking about. Still, the only difference between someone in San Francisco and someone in Missouri is time.
See, the mortgages are higher, and I can agree to that. But, the car payment is not a necessity. From living out on the West Coast, I’ve seen that most people convince themselves that they ‘need’ a new car. Mostly, it’s the ‘keeping-up-with-the-Jone’s’ mentality. Truly, noone needs a new car, they just need one that runs. But, in California, it’s all about appearance. Any red-blooded American can tell you that.
You say that you can’t pay cash for everything and I completely disagree. Our culture has been brainwashed into thinking that we need credit. In reality, we need to learn how to live on the money we make. It’s not that difficult and it’s one of the first things we learn as a kid. I remember saving my allowance for months so I could buy some cards (I collect baseball cards). The only difference between adults and kids is restraint and discipline.
The whole credit card game is not responsible either. You talk about working the system, but you have to remember who’s making the rules. Last I checked, it wasn’t the consumer. I think Dave said it best, “if you play with snakes, you’re gonna get bit.”
I think you have some valid arguments, but I think they’re misleading and definitely influenced by today’s credit environment. I appreciate your feedback.
Cheers.