Wednesday, December 2nd, 2009
First of all, this isn’t a “bash Dave Ramsey” post. Rather, I greatly admire Dave Ramsey and his overall philosophy on personal finance.
I’m sure most of you have heard of Dave Ramsey (he seems to be everywhere these days), but for those of you who haven’t, Dave Ramsey is a popular financial guru –he has a radio show as well as a TV program on the Fox Business channel.
Dave teaches what he calls “The Baby Steps“. The Baby Steps comprise of 7 steps that Dave believes anyone can take to achieve wealth (or as he calls it, “financial peace”). Dave outlines these steps in great detail in his book, The Total Money Makeover
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I first read his book about a year ago and I have been listening to his free podcast on iTunes for about 4 months. I definitely recommend this book to anyone who is just starting to get a handle on their personal finances.
The process Dave uses in The Total Money Makeover is to take the reader through a journey as though they are completing each baby step during the read. Before discussing the particulars of each step and the subsequent reward, Dave methodically strives to hammer one idea into the reader’s head: Your money problems are your fault and it’s only through self-decipline in handling money matters that you can achieve financial peace. Basically he says that his steps will only work if you change your behavior in regards to money. I couldn’t agree more.
I am not going to review each one of Dave’s baby steps in this post (you can get them from his website), but I want to touch on the first two and express what I believe to be inconsistent (and potentially unhelpful) advice. I’d also like to open the discussion up so please comment or email me with your thoughts.
Dave’s first baby step is to save $1000 in an emergency fund –that is, money that should only be used if you find yourself in dire straits while you’re working on baby step 2.
As a prelude to outlining baby step 2, Dave suggests that you get intense and do something drastic: cut up all your credit cards (he calls this a “plasectomy”). He tells the reader to close all credit card accounts that are paid off and pay off any credit card account with a balance as quickly as possible and then close the account.
Baby step 2 says to pay off all your debt (except the house), smallest to largest. At this point, he is assuming the reader has sworn off credit completely –forever.
This is where I find several inconsistencies. First of all, there is a big fat elephant in the room which Dave cannot avoid: closing all of your credit card accounts is going to ruin your credit score.
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Posted in Book Review | 48 Comments »
Thursday, July 9th, 2009
Reader Question
Hi Ryan,
How soon will my credit score improve after I pay off my debt?
I am trying to figure out what is important. I was hoping you might be able to give me some insight.
Thank you in advance.
[name removed]
My Response
Hi [name removed],
I wouldn’t expect a huge jump in your credit score after paying debt off –the FICO score is, of course, largely based on you having debt. However, this is not to say your score won’t raise after you pay off debt. This is because you will be lowering your debt to credit ratio. Your debt to credit ratio should remain low if you want to maximize your credit score.
Hope this helps,
Ryan
[ratings]
Posted in Reader Questions | 1 Comment »
Tuesday, May 19th, 2009
Reader’s Question
Ryan,
I have 120 days past due with my GEMB/LOWES Card so they sold it to another lender who I am paying through a debt counseling co. GEMB/LOWES is reporting my PAY STATUS as 120 days past due although I have not missed a payment with the lender who bought my debt. Can I get this statement removed to read PAID AS AGREED?
Thanks!
[name removed]
My Response
Dear [name removed],
It sounds like you’re using a debt settlement company to pay off your debts. The problem with debt settlement companies is while they will settle your debts (eventually), your credit gets destroyed in the process.
The way it usually works is that you basically setup a savings account with the debt settlement company and pay them an amount you can afford on a monthly basis. Once you have enough money in that savings account to settle debt, they will attempt to negotiate with the collector on your behalf for settlement. The problem is that the debt settlement company requires that you stop paying the debt to the creditor while you are paying them. This is what destroys your credit. I’m afraid that unless you take matters into your own hands and stop paying this company, your credit will only continue to get worse. Trust me, [name removed], you can do this on your own if you follow the steps outlined in my blog.
Best,
Ryan
Take Home Point
Many people arrange for their debts to be handled by a debt settlement company falsely thinking that all of their credit problems are going to be fixed overnight and all they have to do is give the debt settlement company a small percentage of the amount successfully settled. The fact of the matter is that going this route is not easy –in fact, its painful because when you stop paying your debts directly to the creditors, the late payment entries pile up. Remember, the business model of debt settlement works by telling their customers to stop paying their debts and start saving money in a savings account with them. While this is good if you absolutely cannot afford your debt payments (the debt settlement companies will adjust your savings amount according to your affordability), they will not pay ANYTHING to the creditors until they think they can settle the debt.
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Posted in Debt Settlement Companies | 1 Comment »
Monday, May 11th, 2009
Reader’s Question
Dear Ryan,
Once divorce, does my ex-husband’s credit score get better since the bad debt was under my name?
My Response
No, credit scores and marriage are not tied together. If you are getting a loan together, they may take both credit scores into account, but that doesn’t mean your actual credit score is affected by your spouses credit.
Best,
Ryan
[ratings]
Posted in Reader Questions | 2 Comments »
Saturday, November 17th, 2007
The average credit score in the U.S. is 680
This average varies by state with South Dakota having the highest average (710) and Texas having the lowest (651).
Credit Scores range from 300 to 900
300 indicates horrible credit and 900 indicates perfect credit (I doubt anyone actually has a 900 credit score). You can also have a credit score of 0, but this isn’t included in the range because it would simply mean that you have no credit.
Statistics from creditreport.com
Posted in The average credit score | No Comments »
