“Should I cut up my credit cards?”, we hear it a lot. We will get down to why Dave Ramsey may be wrong.
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.
Why Dave Ramsey Says To Cut Up All Your Credit Cards
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, The Total Money Makeover 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 discipline 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 regard 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 book), 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.
Do You Need a Plastectomy?
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 “plastectomy”). 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.
Why You Shouldn’t Cut Up Your Credit Cards
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 Cards is Going to Ruin Your Credit Score
I made this mistake when I started my credit repair journey.
Dave’s response to this is simple, but in reality, misleading and unhelpful to most people. Dave says that people ought not concern themselves with their credit score. After all, having sworn off credit himself, he doesn’t even have a FICO score.
Dave claims that if you use his baby steps you will become rich, and I believe him. However, it should also be noted that even he admits this process takes decades. Do you want to pay an extra $50 per month on your car insurance until you become rich because you don’t have a FICO score? I don’t. Your car insurance premium is only one out of dozens of problems that will arise in your life with a poor (or no) credit score.
Do you ever want to get a decent rate on a mortgage? This is debt that Dave permits, by the way, because even he realized that most people cannot simply save $150,000 or more. Nonetheless, there is no such thing as a mortgage lender who doesn’t at least look at your FICO score. I dare anyone to find one, honestly.
Do You Really Need to Cut Up Your Credit Cards?
Aside from the problem of ruining your credit score, the inconsistency really lies in the fact that prior to this, as we have discussed, Dave says that we need to become disciplined in money matters, yet at the same time he tells us that we lack the self-restraint to maintain an open credit card account without charging it off. The point is that anyone who lacks the ability to not use their credit card, more than likely also lacks the ability to save their $1000 emergency fund just for emergencies.
This all, of course, is a journey where we are supposed to acquire the skills to be successful with money, and this requires that we teach ourselves self-restraint rather than destroy the ability to be tempted.
Again, I wholeheartedly treasure Dave’s overall financial advice –it’s a real gem. However, I would kindly suggest that anyone who is starting with Dave’s Baby Steps, reconsider closing your credit card accounts. After all, with a little self-restraint taught by Dave Ramsey, it’s just as easy to put your cards in a dresser drawer and not use them.