Why Dave Ramsey is Wrong About Credit

Earlier this year, I shared a post about three crucial ways I believe Dave Ramsey is wrong about money.  This post sparked quite a bit of interesting debate, so I thought I’d turn it into a series so we can dive deeper into this topic.

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First of all, who is Dave Ramsey?

If you aren’t familiar with Dave Ramsey, he’s a personal finance expert and radio show host who has helped thousands of Americans to break free of debt.  He has authored books, teaches a class called Financial Peace University, and offers speaking events around the country.

I’m a huge fan of Dave Ramsey!  Reading his book The Total Money Makeover shifted my perspective and changed my life.  It inspired me to get out of debt, and my hubby and I recently finished paying off $127,000 of debt (mostly student loans).

I have so much respect for Dave Ramsey and I agree with maybe 80% of what he teaches, but there are a few key areas where we disagree.  The biggest fault I find with Dave’s approach is his advice on credit cards.

Dave’s Approach to Credit

Dave is staunchly opposed to credit cards and tells everyone to cut up their cards.  His advice? Ignore your credit score completely and pay cash for EVERYTHING. He likes to say that “cash is king”.

While I agree that paying cash for everything is preferable, I also live in the real world.  Dave Ramsey resides in a $12,000,000 home.

Are there people who aren’t millionaires who still manage to pay cash for their homes?  Yes, and that’s awesome! But, realistically, most people don’t have $100,000+ in cash sitting around.

Buying a House Without Credit

How do you buy a home when you have no credit?  It’s not going to be easy. There are some mortgage companies that will do manual underwriting (where they ignore your credit and instead look at other factors, like whether or not you pay your bills on time).  

However, many mortgage companies won’t do this because it’s more work for them. They’d much prefer to simply pull your credit score and base your interest rate on your credit score.

If you manage to find a company that will do manual underwriting, you need to make sure you’ll even qualify.  You won’t be able to do it if you’ve been living with your parents and paying them rent (as many millennials do).

My Opinion on Dave’s Advice

Dave’s advice on credit cards makes sense for SOME people, but not for everyone.  If you’re able to pay cash for a home or you can find a mortgage company that’ll do manual underwriting for you, then you probably should follow Dave’s advice.

However, if you don’t have the ability to pay cash for a home, you want to be a homeowner, and you’re not sure you’ll qualify for manual underwriting, then following Dave’s advice would be a terrible idea.

If you pay off all of your debt (as Dave recommends you should) and close all of your credit cards, your credit score will eventually change to zero.  

Now what?  

You probably won’t be able to buy that $200,000 home you want unless you have $200k in savings.

My Advice on Credit Cards

If you have the ability to use credit cards responsibly, I recommend keeping one to three cards open.  Pay the balance in full every month so you won’t be wasting money on interest. Keep it simple by only charging certain things (for example, gas) to the cards each month.

When my husband and I had paid off the majority of our student loans, our credit scores took a nosedive because we had closed too many accounts.  Once the accounts were all paid off, our credit scores would’ve eventually become zero. To avoid this, we opened two credit cards.

We chose cards that have no annual fee and offer consistent cash back rewards.  We’ve set it up so that the full balance is automatically deducted from my bank account each month so I don’t ever have to worry about missing a payment.  

It’s easy and convenient, and our credit scores increased from 650 to 750.

This approach might work for frugal people, but what if you’re a spender?

If one spouse is a saver and the other is a spender, one option is to have the frugal person manage the cards.  

My husband is a spender, so I manage his credit cards and my own.  We know it would be too tempting for him to have a credit card.

What if you’re single?

If you’re a spender and you’re single, you’ll need to weigh the pros and cons of getting a credit card.  How much can you boost your credit score by opening a card? Will getting a lower interest rate on a mortgage be worth the potential risk?

You know yourself and your unique situation best.  Do what makes the most sense for you.

Keep in mind that if you end up racking up a bunch of credit card debt, that isn’t going to help your credit score.

Credit Matters

I’m a huge Dave Ramsey fan, but I don’t agree with his assertion that credit scores don’t matter.  That’s true for some people but certainly not for everyone.

Do what makes the most sense for your particular situation.

You do you!