Sorry Dave.

…or Why I disagree with Dave Ramsey about Credit Cards

I am a big fan of Dave Ramsey, perhaps the leading exponent of common sense in the country. He has helped literally thousands of families out from under the yoke of debt-slavery. We have purchased – and given away – several of his books, and I regularly listen to his podcast. He is a constant source of encouragement to me and millions across the nation.

But there is one area in which I disagree with him, and that is in the use of Credit Cards. His position is simple: cut up the cards and close the accounts.

I understand and respect his position; the Credit Card companies have spent billions  to try to persuade us to live outside our means and use Credit to fund the deficit. As a result, many people do not know how to use Credit Cards responsibly; they use the Credit Card as their “Emergency Fund”; they carry a balance and pay finance charges; they pay late and attract exorbitant fees.

A good friend of mine got badly mauled by credit cards once, and considers them evil. He may be right. Rather than lending money only to those who can afford to repay, the moneylenders rewrote the bankruptcy laws instead. Under the new law, it becomes much harder to declare a “clean-slate” (chapter 7) bankruptcy; instead, people are boxed into a “repayment-plan” (Chapter 13) bankruptcy – which has the highly desirable side effect of securing their previously-unsecured loans by court order.

So why do I disagree with Dave on this fundamental issue? Because I don’t use credit cards like most people do. I have not paid any Credit Card interest or fees since 1999…and I never will. A years ago I had three cards. Now I have only one (the other two annoyed me and I dropped them). I have used it twice in the past year. I use my debit card for all of my regular bills and most of my purchases. Having said all that, the simple fact is that there are some situations where a it is more sensible to us a Credit Card than a debit card.

  • Federal law protects you when you use a credit card. Your bank may extend the same protection to your debit card, but they don’t have to – and that courtesy may be withdrawn at will. Bottom line: Your Credit Cards are protected by law; your Debit Card isn’t.
  • When you buy something with a Credit Card, it is not legally yours until you have paid the bill – which gives you some leverage if the item is not as expected. When you buy with a Debit card you bought it. If there is a problem, whose money do you think the bank will work harder to protect – theirs or yours?
  • If you are buying something online from a seller you have not dealt with before. There are a lot of phishing scams and bogus websites out there – would you rather give them a credit card number or a direct line to your bank account? For this reason I have recommended that Internet Newbies use a low-balance ($100 or $200) Credit Card when ordering from unfamiliar online merchants.
  • If you “overdraw” your Credit Card, the CC company will decline the transaction, which can be embarrassing. If you overdraw on your debit card, the bank will pay out… and then eat you alive with charges and fees.

And finally, Dave, this one’s for you: I’ve heard you say “No millionaire I talk to says they made it with Points”, but that is a straw man argument – it is not about “points” and never was. The real question is “How many millionaires do you know who use Credits Cards? How many don’t?”

Having said all this, I have to say that I do not recommend using Credit Cards. That seems an odd thing to say, but what Dave calls “snake charming” requires iron discipline and concentration, and most people cannot do it – giving them a credit card would be like giving a drunk a drink.

A credit card should only be used if :

  • You have the money. You have the money in the bank to pay off the card. You have it now, not at some point in the future. Using a credit card to “live now, pay later” is courting disaster.
  • You NEVER carry a balance. Only fools carry a balance on their Credit Cards.You pay off the bill when it arrives: Don’t play chicken when due dates. They are praying that you miss the deadline.
  • You have zero tolerance for fools: The moment that they do anything that annoys you, you are willing to cut up and cancel the card. Of course you can only do this if you have a zero balance… in the last six months I have canceled two of my three cards because the card issuers annoyed me.
  • You don’t care about your FICO score. Only people with money in the bank can afford to cancel their credit cards. Ironically this hurts your “I-Love-Debt” score (also known as the FICO score). I recently cancelled a year-old Discover card and my FICO score went down by 18 points.

My Credit Card purchases during the past year are as follows:

  1. Water Heater (old one broke).
  2. Dining Set.
  3. Airline Tickets.

In every case, the money to repay the balance was already in savings (sounds odd, but it takes about a week to move money from my savings, which is by design). In every case the balance was paid off in full. Any other use is unacceptable.

Bob Hope once said “A Bank will lend you money if you can prove that you don’t need it“. To that I would add:

Buy it with a credit card only if you can already afford it“.

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