Dave Ramsey is a well-known expert on personal finance who is followed and listened to by millions of people. Ramsey has offered guidance on a wide range of topics, but his stance against debt is probably the one that has brought him the greatest recognition.
Ramsey is adamant in his belief that it is possible to live life to a significant extent without borrowing, and he advises people to avoid using credit cards. Unfortunately, his recommendations about the usage of credit cards could really end up having a negative impact on your finances, and the majority of individuals should choose to adopt a different strategy. So, why shouldn't you pay attention to what Ramsey has to say about using credit cards? Here are four reasons that demonstrate why he has the wrong idea and advice on this matter:
One of the most significant advantages of using credit cards is the possibility that you will be able to raise your credit score. As you make purchases with your credit cards, you build a positive payment history, which is the single most important factor in the calculation used to determine your credit score. Your credit score can be improved by keeping a credit card for an extended period of time and keeping the balance at or below 30 percent of the total credit that is available to you.
Ramsey suggests that giving up these benefits of building credit is not a big deal because there are other ways to "prove you're responsible with money." He cites timely payment of "regular bills" such as cell phone bills, utility bills, and other bills as examples, and asserts that "the appropriate creditor will take that into account."
However, payments made toward utilities and mobile phones are not typically reported to the three major credit bureaus. As a result, your track record of making payments toward these bills does not contribute in any way to the development of a positive credit record.
In addition, although it is occasionally possible to find lenders who are willing to look at other financial credentials, the vast majority of loan providers and credit card issuers are going to focus on your credit score as the primary factor in their decision-making. If you take Ramsey's advice, you will limit your borrowing options unnecessarily, which will make obtaining a loan such as a mortgage significantly more expensive, and it will also reduce the number of options available to you.
Another significant advantage of using credit cards is the availability of rewards programs, which can earn you cash back, merchandise, or free or reduced travel simply for using your card for regular purchases. These benefits can be extremely lucrative, frequently totaling hundreds or even thousands of dollars annually.
Because of "repeated membership fees" and "all the interest you end up paying," Ramsey regrettably concludes that rewards aren't worthwhile. However, if you just use your cards sensibly, it is actually possible to completely eliminate interest fees. Additionally, a lot of credit cards don't even have membership fees, and those that do typically offer a ton of other worthwhile benefits like free checked bags or access to airline lounges. There is no reason to stop earning rewards for purchases if you are confident that you can pay off your cards before your creditors start adding interest.
Ramsey says that it's not worth it to get rewards from credit cards because they don't last forever. This is a bizarre statement, since rewards on most cards don't go away as long as the account is still open. Even if the rewards have an expiration date, you could still get something out of them if you used them before the date.
It is simpler to prevent fraud losses when using a credit card to pay. The money disappears from your account right away when a thief uses your debit card. Legitimate expenses that you have scheduled online payments for or paid for with postal checks may bounce, resulting in fines for insufficient funds and a negative impact on your credit. These missed or late payments, even if they are not your fault, might harm your credit rating. While the bank conducts its investigation, it can take some time for fraudulent transactions to be undone and money to be put back to your account.
In contrast, if your credit card is used fraudulently, you won't lose any money; all you have to do is inform the credit card provider of the fraud and refrain from paying for the erroneous purchases while it handles the situation.
You shouldn't listen to Ramsey's advice to stay away from credit cards. As you can now tell, you will miss out on way too many benefits that credit cards do, in fact, provide. Instead, you should use cards in a responsible way by picking a card with good rewards, paying it off in full every month, and making sure not to charge too much so you can get a good credit score.
With the help of a fiduciary financial advisor to help guide your decisions, you stand a much better chance of retiring comfortably—and maximizing your sources of income so you can live the life you want.
Contact Vincere Wealth to start today.
Hi! I’m Josh Bennett, CFP®, EA, an unashamed personal finance nerd.
When I graduated from Indiana University, I became fascinated with everything finance. With consistent learning and research, I became a Certified Financial Planning™ Professional to ensure that I could guide the financial health of others.
I started Vincere Wealth as a fee-only practice dedicated to helping families and businesses keep and grow their wealth.
At Vincere Wealth, we help you to live your best life and create a work optional lifestyle. We understand that your personal finances can get complicated. And if life leaves you too busy, finances can get pushed to the side, which makes you feel frustrated and overwhelmed. We want to help you simplify your finances and make it as easy as possible for you to conquer your goals. We craft a detailed and actionable financial plan that complements your family and career. We provide a thoughtful investment strategy that aligns with your plan. And we believe everyone should feel confident in their financial future, regardless of the size of their investment account.
When not working with families, I enjoy hiking with my wife, Daniella, son Ethan, and our dogs, Manny & Marvin. I also enjoy reading a good book, watching a movie, smoking any type of meat, training for triathlons, or doing some sort of photography.