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I’ve been hearing a lot about Dave Ramsey, but I didn’t know too much about him other than he was a no-debt guy. I did, however, have friends who swear by him, and thought I should give him a look. Now, I’m not a talk radio person, so I knew listening to the guy was not an option. I am, however, a reader, and so last week I picked up a copy of the Total Money Makeover.
I think it’s a great book that provides easily accessible advice. I have several friends and at least one family members that will be receiving copies as birthdays and other gift-giving events arise. But I do question one of Ramsey’s strongest assertions: Credit cards are just debt waiting to happen, and you need to not have them.
I’m with you on a lot, Dave, and I’ve had my share of credit card debt issues, but I don’t agree with that sentiment.
Basic Advice Told Plainly
As Ramsey states pretty clearly, good money management isn’t rocket science. Spend less. Earn more. Use the extra to give yourself some space to breathe with an emergency fund and pay off your debts. Once you’ve done that, use the extra money to invest.
Simple steps, one at a time. If you have to go back and start over, start over.
I like that he doesn’t think it’s easy. Simple, not easy.The personal stories he uses to illustrate his points constantly emphasize that the Total Money Makeover is a sacrifice. It’s hard work now for a better future. It may involve people who don’t have the same mindset not understanding or accepting your choices.
The basic advice is solid too. You have to get the bleeding stopped first before you can begin healing. A small emergency fund will keep you from racking up more debt when you have a small bump in the road like a minor medical bill or a car repair that you didn’t include in your budget. The debt snowball will pay things off quickly by rolling the additional surplus into paying off debt.
I love that Ramsey keeps pointing out the connection of debt and risk. A HELOC sound like a good idea, until you realize you’re putting your house at risk. The Total Money Makeover is good at pointing out that most people would be better to put their money on the defensive instead of using it to leverage yourself into a better standard of living. As someone who has gone from a steady and secure job to a more uncertain situation, that’s rung true. I have to say that it’s been good that we only had mortgage debt when I lost my job last year.
When Credit Cards are Debt Waiting to Happen
Much as I like the book, I do have some caveats, but I’ll just stick to one today. (For some great points on Ramsey’s opinion on investment returns, check out this post from She Picks Up Pennies.)
I’m not crazy about Ramsey’s no credit card rule. I’ve had credit card problems, and had to work like crazy to get rid of my credit card debt when I was younger. I know the problems credit cards can cause if you are undisciplined in their use, and I know you can overcome those issues.
Like a lot of kids in the 80’s, I applied for my first credit card as a brand-new freshman wandering around the activity fair during the first week of college.
Needless to say, I got the card. And for a while, I was really good about paying the card off each month. I had a good amount of savings to float me freshman year and a job for the next three. I generally got to spend as much as I cared to spend on going out and having fun while still paying for books, toiletries, and gas for my car.
What I didn’t use it to pay for was car maintenance. I had a car, but didn’t understand the maintenance needs and schedule. In high school, my dad would just randomly tell me he was taking my car for maintenance. I never really caught on that there were things that needed to be done on a regular basis to keep the car running. Once i was on my own at school, those needs weren’t taken care of until a more practical friend clued me in to the reasons for things like regular oil changes and tire rotations.
It was too late. Eventually, the car had problems, as you would expect from a car that had lacked preventative maintenance for a few years. The old blue Tempo started having expensive problems that resulted in expensive repairs that I didn’t have the cash to cover. Repairs went on the card, and I started paying interest instead of paying off the card.
I was still managing to pay off the any other monthly charges and I was whittling away at the big balance. I didn’t understand debt any better than I had the car maintenance schedule, and I’d started adding other debt as well. By this time, I was in grad school, and had also picked up a gas card and some student loans to cover the summers when I wasn’t getting a stipend. Eventually, the car needed a new engine, so my dad cosigned a car loan for me too.
All seemed okay, though those balances were growing, until I decided to drop out of grad school. In and of itself, dropping out wasn’t a bad idea. I didn’t enjoy being an academic, and a PhD in political science didn’t seem to lead anywhere else. I didn’t have a plan for post-academia, though, and I drifted for a while before finding a job…selling encyclopedia sets on commission, just when Encarta and other disc-based encyclopedias were becoming the norm.
Flipping burgers would have been a better idea.
Needless to say, I learned a lot about rejection and spent more in gas than I made in commission. I couldn’t pay my bills or my debt, and my parents brought me home. I worked a bit for my dad while trying to work out payment plans with the collections people and lived with my mom. I got some help over the hump and started a fun but not particularly lucrative job selling used books. A few promotions later and I was able to get more aggressive about paying off debt and beginning to save for the future.
Credit Cards Require Discipline
It took a while to work my way out of debt, but I vowed that I would never get in credit card debt or back in collections again. I lived without credit cards for a while and paid off the old accounts. I don’t know what my credit score was, but it had to have been awful.
Eventually I took a Target credit card out and used it once a month to purchase toiletries and other things I would have purchased anyway. My charges were usually about $30 and the total balance was paid off as soon as I got the statement. I slowly rebuilt my credit. Eventually the Target card became a Capital One Visa. I took out car loans and paid them off. I bought a house and took out a mortgage.
I have had enough debt to understand Ramsey’s point that debt is a risk and a millstone, and life is better if you don’t have it. I have no intention of ever taking out another car loan, and I’ll drive used cars. I see no reason to take out a HELOC or carry a credit card balance.
Jon and I have mortgage debt on our home and on a rental property, but that’s the only debt we carry. I know we need to keep it that way, and I’d love to get those mortgages paid off faster.
But I still keep and use credit cards. I just don’t see them as debt.
I track my expenses on credit just as carefully as I track my use of cash. I compare them to our income and reserves, and I don’t make extra purchases or use the cards to float us until the next paycheck. I see credit cards as a convenience, but never charge if I don’t have the money in the bank to back it. I rebuilt my credit score from awful to awesome by being very careful about my credit utilization.
According to Ramsey, you don’t need a credit score. You don’t need a credit card. You don’t need any loans, except maybe a mortgage and with a big enough down payment you can get that even without any other credit. Work really hard and you can pay for a house outright!
I don’t agree. Life may be better with no credit than it is with bad credit, but it’s pretty good with good credit that you use responsibly. Being responsible with credit allowed us to easily get a mortgage and to get rewards for making the purchases we were going to make anyway.
It’s a little more risk to use credit cards, but Risk is not always to be despised. Getting in my car to go to work is a risk but I do it.
I have no desire to take on more debt. I really don’t want to pay interest any longer than I have to, and I’ll work to shed the mortgages we hold faster and get to that happy debt-free place.
But I don’t see how using credit cards has to automatically mean more debt if I’m careful, responsible and disciplined in how I use it.
How do you feel about credit cards? Are they too risky, a gateway drug to spending more than you can afford? Or are they a beneficial financial tool whose risks can largely be mitigated by responsible usage?
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