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
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Posted in Reader Questions | 1 Comment »
Sunday, November 23rd, 2008
Reader’s Question
Do you have any advice on debt settlement companies? I am involved with one now and I am not sure I made the right decision.
Thanks
Response
Hi there -
I personally do not like debt settlement companies and wouldn’t advise anyone to use one. The true benefit from getting out of debt is the joy and pride that is gained from knowing you did it yourself –not to mention a sincere and recognized change in your future behavior. That is, once you have gone through the hell that is required to get out of debt, you will never want to do it again. Besides, more than likely you will end up paying much more using a debt settlement company.
Best,
Ryan
Posted in Reader Questions | 1 Comment »
Saturday, November 22nd, 2008
Reader’s Question
Dear Ryan -
I wanted to know. I have a big account on my credit report of about 17,000 dollars. It’s from a car I used to have. Is there anything that I can do about that to try to remove it. I can’t afford to pay that amount and the collection agency keeps bothering me. Please help. Also, if any account is not on your credit report do you still have to pay off any outstanding balances?
Response
Dear [name removed],
A debt with such a high balance would be near impossible to get removed. Even if you do get it removed, the company will probably still sue you before the statue of limitation is up in your state. Just because an account is not listed on your credit report does not mean you don’t still owe the debt.
Hope this helps,
Ryan
Posted in Guest Article | No Comments »
Thursday, November 29th, 2007
One of the first steps I recommend when repairing credit is to pay down any credit accounts where the balance is more than 25% of the account’s credit limit. When your credit score is calculated, substantial consideration is taken on a simple calculation. This calculation is called your “utilization”. It simply means, “How much of your total available credit are you currently using?” In other words, “Is this person spending money without keeping in mind it must be paid back?” Utilization is a huge factor when a credit score is calculated.
Two things are taken into consideration in regards to utilization when your credit score is calculated. First, your overall utilization. This is calculated by adding together the balances of all of your revolving accounts, and then adding together all of the credit limits. Then divide the balance by the limit.
Overall Utilization Example
- Credit Card #1 — Balance: $300 Limit: $500
- Credit Card #2 — Balance: $100 Limit: $300
- Credit Card #3 — Balance: $500 Limit: $1000
- Total balance: $900 Total credit limit: $1800
- Utilization = $900 / $1800 = 50% Total revolving utilization
In addition to your overall credit utilization, individual credit account utilization is also taken into account. This basically means that if you have ANY individual account where the balance is over 25% of the credit limit, it is likely hurting your credit. Therefore, even if your overall credit utilization is under 25%, if any one of those accounts have a balance over 25%, your credit score is affected.
It’s about ratio, not actual numbers
I have been asked if the credit limit dollar amount matters. Specifically, if one has a credit card with a credit limit of $200, and every month it’s reported that this person uses 75% of the available credit, does the same (as previously stated) apply. Logic may tells us that it shouldn’t apply because it’s likely that this person can easily pay off a $200 balance every month. However, utilization does apply –the limit does not matter. If you have a credit card with a $200 credit limit, spending over $50 will hurt your credit score.
When you are repairing or building credit, it’s good to have a credit card even if the credit limit is low. However, as you begin to build credit, it is in your best interest to request credit limit increases when the time is appropriate. Remember: keep your utilization as low as possible –preferably at or around 25%.
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Posted in Repair Credit | 18 Comments »
