Why Even Dave Ramsey Needs to Consider His Credit Score

Recently I heard financial author Dave Ramsey say he didn't care what his credit score was because he never needs credit (in other words, he never borrows money.) This, unfortunately, is a simplistic view of what a credit score is used for and the various parts of your life that can be impacted by it. Yes, Dave Ramsey probably doesn't have to worry much about his credit score, but unless you're a multi-million-dollar radio personality, you do. Even if you have no debt (like I do), you still need to keep track of and manage your credit score. Why? Because your credit score matters to many people/organizations other than just banks and lending institutions. Here's who Kiplinger's says is interested in your credit score:

How much do you know about your credit score? That three-digit number is tied inseparably to our financial lives, yet many young adults haven't given it the attention it deserves. Your score can play a role in your ability to rent an apartment, qualify for a loan or even get a job. It can also affect how much you'll pay on interest charges, insurance and even cell phone contracts.

The piece then lists the advantages of having a good credit score including:

1. Having a good rating can help you qualify for the best rates on a mortgage, car loan, credit card and even a small business loan if you've got that entrepreneurial spirit.

2. A recent survey by Consumer Reports among eight popular auto insurers found that drivers with top [credit] scores could pay up to 31% less on their premiums than if credit scoring wasn't factored in, while those with bad scores would pay as much as 143% more.

3. Landlords view your credit rating as a measure of your responsibility to pay bills on time. If your rating is below par or you don't have a credit score yet, you may have to find a friend or relative to co-sign your lease, or you could be required to pay a higher rent or security deposit.

4. When you're applying for a job, potential employers can pull your credit report as long as they notify you first. And, in fact, about 35% of them do. Bad credit can be a signal of irresponsibility, or employers might be worried you'll spend more time fretting about your financial woes than concentrating on the job.

They then use this example to show the dollars and cents behind the issue:

Now both are ready to buy homes, and they each apply for a $250,000 30-year mortgage. Through Jim's responsibility, he's been able to build a score of 750, qualifying him for a loan with a 6.2% interest rate, according to Fair Isaac, a credit scoring bureau. Mark's score comes in around 650, netting him a rate at 7.3% interest. Jim's monthly mortgage payment is $1,536 while Mark pays $1,718 -- a difference of $182 per month. If they both live in their homes for ten years before selling or refinancing, Mark will pay $21,840 more in monthly payments than his friend.

Mark also gets burned on a new auto loan -- paying $1,332 more over three years on a $20,000 loan than Jim. Plus, Mark probably paid much more for his car insurance than Jim.

The piece ends with some tips on how to get a good credit score (in order of importance):

• Pay on time.
• Don't max out your cards.
• Start while you're young.
• Avoid opening several accounts at once.
• Get the right kind of credit.

I must admit that I don't monitor my credit score as closely as I should. I assume it's ok since I have no long-term debt, pay my credit cards off each month, and pay my bills on time, but I don't know where I stand for sure. I need to add "check credit score" to my list of money to-dos.

So in the end, even Dave Ramsey needs to consider his credit score -- that is unless he wants to pay too much for car insurance. ;-)

Comments

[HouseHopeful]

I listen to Dave's show sometimes & I've actually heard him say that he'd rather pay higher insurance than to play with the credit card devils.

[James]

FMF,

A good posting. I just wanted to add a couple comments.

1) My credit checking service (I'm a landlord) is now telling me that I can't see someones full credit score. I can only get a yay/nay decisions.

2) Second, the major point about your credit score is that it determines your cost to borrow money. If your credit is bad, you need to pay more to borrow money (e.g. through a higher interest rate) .

Best,

James

[segfault]

I've never listened to Dave Ramsey, but I can tell from looking at his website that he'd annoy me to death.
1. Debt, properly utilized, can be good.
2. There are probably a lot of people in debt who need help that are turned off by his emphasis on the integration of religion with personal finance.

[Minimum Wage]

My credit went in the tank several years ago (illness/hospital/loss of income) and I've been without credit the whole time and I have some sticky credit problems which won't drop off my report until resolved but I can't resolve them on a minimum wage income so I'm resigned to never again being able to borrow money.

[FMF]

"There are probably a lot of people in debt who need help that are turned off by his emphasis on the integration of religion with personal finance."

Actually, that's one thing I like about him. ;-)

[Blaine Moore (First Time Home Owner)]

Maybe Dave Ramsey doesn't drive a car?

As for keeping track of the credit score, I have (this month) started checking every two months. This month, I checked my report, in June I'll check my wife's. In August, I'll check mine with a different company, etc etc. That way we keep an eye on our score throughout the year and by using even months I might even remember to go through the process.

[debtfreesteve]

I love Dave Ramsey's comments re: credit scores etc. One example he uses is that, he could not 'rent' an apartment because of his credit score, however, he could Buy the entire complex. Credit scores are not barometers of financial success, by any means.

[Suze]

My last two employers checked my credit score during the hiring process. My last employer (prior to the company I am now with) routinely made hiring decisions based on many factors, credit scores being one of them.

Most of us need to borrow money, get auto insurance, and apply for jobs so we do need to keep tabs on our credit scores.

[FMF]

I'm not saying credit scores are barometers of financial success. I'm saying you can save some $$$$ (as well as get some other benefits) if you manage yours correctly.

[Sara]

I love Dave Ramsey, even though his plan for financial success is not for everyone. The reason he "doesn't care" about his credit score is because if you follow his entire financial plan, you wouldn't take on debt like a car loan (he advocates buying used cars with cash). His credit score is actually probably fine because you can build your credit score by paying your utility bills on time. You don't HAVE to have a credit card.

Anyway, of course debt, if managed properly, can be a useful tool. Credit cards can be useful and have nice benefits if you pay them off every month. Everyone INTENDS to do that, but how many people actually do? A very small percentage. But if you're on this website, you're likely to be a member of that small percentage. Dave Ramsey advocates a whole new way of thinking about debt that is revolutionary for the average person (ie: not really a person who regularly reads personal finance websites). I read a lot about personal finance, but reading Dave Ramsey's stuff changed my mindset about things like new v. used cars and saving money by buying more things with cash and negotiating the prices down rather than using credit cards.

I am also not a particularly religious person, but do not find his integration of religion into personal finance at all annoying. In his class, he advocates including tithing or giving into your budget and very occasionally quotes scripture.

Anyway, sorry to go off on a tangent of sorts, but there are so many scammy "financial gurus" out there and Dave Ramsey is one of the good ones, even if you don't agree with everything he says, so I feel the need to defend him.

[HappyRock]

Dave's arguments would be that having no credit score doesn't hurt you when trying to get car insurance or mortgages, because you need to go to a quality company that does real underwriting rather than mass underwriting based on things like credit score. He says you will get similar rates.As far as car loans Dave would if you have one pay it off, if you don't pay cash.

I don't have any personal experience to share though, my credit is fine.

[Minimum Wage]

Oh, and since my credit is in the tank and I can't pull it out of the tank on my minimum wage income, I guess I am now also unemployable, which guarantees I'll never get out of the hole.

[Moneymonk]

I agree with FMF, Dave Ramsey financial success is NOT for everyone.

However, paying cash for everything is always good. Credit, financing is not always the best route. If so, 70% of us will not be living paycheck to paycheck.

Bottom line, everyone lives different ways and have setbacks. Avoid consumer debt.

And like Sara said, it's best to go to a quality company that does real underwriting instead of mass underwriting.

A lot of people CAN live w/o obsessing over a credit score.

[debtfreesteve]

I am of the opinion that anyone that would follow the Dave Ramsey plan, will become wealthy, guaranteed. Same as losing weight, if you continue to eat less and burn more calories than you take in, you will lose weight. In my personal situation, we were so stupid with our finances, and my credit score was actually fairly high. If I were to graph it, it would show that the more our net worth has Increased, in direct correlation to that, our Credit Score has Decreased. So I like my fall to a Zero Score, and am more than willing to sacrifice a few $'s a year in order to become one of those 'rich people'.

[Chris Thomas]

This kind of post always cracks me up.

Dave doesn't have a score. Seriously.

Manual underwriting avoids each and every pitfall that you argue is caused by having a low score. Insurance companies do it. Mortgage companies do it. Any landlord or employer worth his or her salt will do it. If you have a HISTORY of paying your bills on time and some cash and a good job history you will receive A rates. Period. As for job applications, I can't freaking imagine a scenario where "Yeah, my score is horrible because I haven't used debt in 10 years and instead I pay cash and I've been saving and investing and here is my impeccable resume and several references" gets you shown the door.

Don't buy into this garbage people. Think for yourself.

[Erik]

You don't need to worry about your credit score to get good auto insurance rates. You can ask them to manually underwrite your application. If they won't do that, then tell them you'll take your business elsewhere. In the competitive industry of auto insurance, I doubt they'll let a credit score get in the way of taking your premium.

Also, if you want to rent or buy a house without using your credit score, you can ask mortgage companies to manually underwrite your application as well. Mortgage companies will do this if you ask them and ask them again. What you need to do is get a record of your last 24 payments as a tenant. Make sure you are always paying on time. If you can show them 2 years worth of payments made on time, they will care much less about your credit score.

Don't follow the teachings of Suze Orman that tells us we need to "worship" our credit score.

[Erik]

You don't need to worry about your credit score to get good auto insurance rates. You can ask them to manually underwrite your application. If they won't do that, then tell them you'll take your business elsewhere. In the competitive industry of auto insurance, I doubt they'll let a credit score get in the way of taking your premium.

Also, if you want to rent or buy a house without using your credit score, you can ask mortgage companies to manually underwrite your application as well. Mortgage companies will do this if you ask them and ask them again. What you need to do is get a record of your last 24 payments as a tenant. Make sure you are always paying on time. If you can show them 2 years worth of payments made on time, they will care much less about your credit score.

Don't follow the teachings of Suze Orman that tells us we need to "worship" our credit score.

[credit card analyzer]

According to my experience, credit scores are very important especially if you are going to apply for a low rate credit card or no annual fee card. The higher your score, the better credit card deal you can make in fact. and as credit card ie really becoming the main financial tool, your credit score defines your overall financial standing. So, you'd better keep it high.

[Tony G]

Dave Ramsey wouldn't suggest that anybody take out a 30 year mortgage.

Dave Ramsey wouldn't suggest that somebody get an automobile loan for a new car.

Anybody who doesn't care about their credit score either is bankrupt or they don't use credit and know about manual underwriting.

You Ramsey bashers should do your homework before running your mouths and keyboards.

[Almighty Dollar]

"...your credit score defines your overall financial standing"

There is a huge push for people to feel that the amount of credit extended to them is an indication of net worth. And, that somehow the Fair Issac Corporation (FICO) and their scoring system on the meaure of credit risk has become the standard of measurement for such "worth". You have probably seen the commercials where the guy says, "I'm thinking of a number..."

The same way the entertainment industry pushes sex to young adults in order to get them to buy more of their products, credit is pushed to middle America as a way to "achieving the life you deserve." Just watch any bank commercial where the people daydream in the storefront glass window about what they could be doing.

The all powerful FICO score has everything to do with debt, money owed and risk. I got tired of paying on stuff that had outlived its usefulness. I got fed up with paying my hard earned money in finance charges and membership fees. Worry, frustration and concern has left my life after learning and following dave's plan. Now I just make our budget every month, balance the check book relax and enjoy life.

[Avo Credit]

In this day and age, *everyone* - even Dave Ramsey - must check their credit report, even if they don't expect to borrow any money. And the reason is Identity Theft. It can happen to anyone. The absolute best way to detect if you are or have been a victim, is NOT by waiting until collectors start calling you and demanding payment for some unknown bills, but rather by simply checking your credit report on a regular basis and making sure there are no surprises there.

[Debt Free]

If you have to use a credit card, you shouldn't be buying. Simple as that. Cash is your friend. You can negotiate with cash better than credit. Imagine how much money you will have if you have no car payment, credit card payment, student loan, or even a mortgage. Being debt free means you are not a slave to creditors. Money that comes in can be invested in good mutual funds, and over 20 or 30 years, you will see it pay off when you are classified as a millionaire. I am doing the Dave Ramsey plan because I am frustrated with paying creditors, and I will be debt free, minus the house, in under 18 months. Listen to his show for free at his site and decide for yourself. It is common sense, but sometimes common sense needs to be spoon fed to us, and he does a pretty good job.

[Stacy]

LOL. Be an individual. Someone is force feeding you the BS that a credit score equals worth. It doesn't! So you have a credit score of 800. Big Deal. You probably have a huge mortgage, several car payments, credit card debt. All I see is someone that can't save. I am someone that couldn't manage money, my credit score was 425 a few years ago. If I would have attempted to fix my credit like everyone told me was needed, I would still be in a financial mess with a "pretty" number. After following Dave's plan. I own my home 100%, drive a nice paid for car, have a large savings account, college funds, IRA's, and a nice investment portfolio. Now, who cares what my credit score is. Money talks. I can get the same insurance and mortgage rates as someone with a credit score. The only difference when I come back from my paid for vacation from Fiji, I am in peace. When I retire at 50, I will be the traveling fool! If you think I have a large income from my job. Nope. I did this on 45K a year. Don't listen to the credit garbage. Teach your kids not buy into the lies, start a new generation of savers!

[Don't be a sucker]

Like it or not, credit scores are what many places use to determine all the things that have been listed in the article. Just becauese a person has crdit cards, doesn't mean they are going to use them irresponsibily. Many pay the balance every month and get rewards. Basically that is just money back from the "merchants fee" we ALL pay at businsses that accept plastic, and what business doesn't. So since you are pay ing this merchant fee whether you pay in cash, check, debit, or credit catd, why not get a rewards card
if possible and get some of your money back ? Of course be very careful what card you choose. If you are lucky enough to bank with USAA, they are the best. A credit Union is good too and many now offer membership to anyone . Look around. Stay away from the well know CC issuers like Citi, BOA Chase ETC.
Credit cards also offer more protection than debit cards. I know a woman who had $400.00 of merchandise stolen recently. She didn't have a probelm getting reimbursed because of the legal protection she got from buying that merchandise with a credit card. It's the law that the CC Co had to pick up the loss. If she had paid with cash she would be out of luck. If using a debit card she would have had a dispute with her bank and there is no guarantee the bank would take the loss. It's the law! Check Mary Hunts website to read her article on debit cards. She won't even have one!

Some of you die hard Ramsey fans need to THINK. Don't be surprised if someday you find out Ramsey is could be backed up by the huge banking/CC industry in spite of his railing against them!
Don't be a sucker! Find out the truth. As the Bible says..
It will set you free!

[Gary in Texas]

I listen to Mr. Ramsey as often as possible and like a lot of what he says, but not the anti-credit card part. I haven't paid a dime of interest or an annual fee on any of my cards for many years. I choose to use cards that give me some percentage of my money back on targeted purchases. So one card gives me 2% back at grocery or drug stores, another gives 5% back on gasoline, etc. They're giving me that money out of the percentage that they are charging every merchant for credit card usage. To cover that, the merchants increase the price of their products for everyone, whether they pay with cash or credit card. I also get buyer protection, travel insurance, and many other perks through the cards.
Bottom line, if you have the discipline to never use a card for a puchase that you cannot payoff at the end of the month, you're throwing away money by not having credit cards. By having them you also get a great credit score even though you're not actually using credit.

[Rondal]

WOW, WOW, WOW!

I seen the comments how you need a good fico score in order to get the car loan, Credit cards, ect. I would have aggreed some time ago. But I see the light. Your credit score does not matter if you are debt free, living within you means.

Buy a house with manual underwritting. That is the only debt you realy should have. Start a buss. you say, well you are allready heading to the bottom if you need to borrow large amounts of money.

You know if some one tells me at a job interview that they can't hire me because I am debt free, (and if you follow daves plan you are not only debt free you have 6 months of living expenses in the bank, and if you been at it a while, even with a small income you have a good portfolio) I would not want to work for them, and I have 6 months of expenses in the bank, and am not in a panic.

You see if you looked at all of Daves plan you would see that after you learn to say I DON'T LOVE DEBT! You will NEVER live pay check to pay check again. You will learn that in order to live like no one else, You will live within you means, and never care what the intrest rate is, as you tell the salesmen wich car your paying for, NOT him telling you witch car they will loan you money on!

[Rondal]

I have to post again, sorry. But, I don't think the people arguing against the Ramseys thought get the idea. We are not about Dave; he just showed us a different view. We all went into it not knowing, but when it hit us, we got it. Pay your cc of each month, ok, what happens when you miss a payment, for any reason? What would you do if you lost your job, live on the cc right? "Oh I only use it in an emergency".

When you follow the plan you have 6 months of cash in the bank, there is no cc for emergency. There is no need to worry about paying the darn cc on time. No overspending. You are more likely to only spend what you can afford when you better understand what you can afford. It is not Dave that makes me think this way, it was only Dave who made me see how DUMB I was being.

[Mooncalf]

Look, folks... I don't like Ramsey's religion or politics. But he's got loose ends tied up. Don't get car loans, or 30-year house notes. The insurance rate you'll get is again reduced by opting for a much higher deductible, which you can afford, if you built the emergency fun he mentions.

[Jim @ InvestWithLessRisk.com]

To the Avo Credit person...Dave says all he has and uses is a debit card, no credit cards. He advocates putting a lock/freeze on your account with all the credit bureaus and carrying Identify Theft Insurance.

To that end why would anybody try to hijack his identity if his score is too low to qualify for anything?

If you use a debit card with a non-PIN credit transaction instead of a debit transaction do you not still get the zero-liability protections of a credit card.

I think that Dave's biggest selling point is the reduction of financial risk. If you save up and pay cash for everything you don't have to worry about your I-Love-Debt Score.

[Eric]

If an employer is basing their entire hiring decision on your credit score without getting to know you (and even asking you why your credit score is low - if it is), you should be thankful to find an opportunity elsewhere. If a company's paradigm is that I will be a faithful worker because I borrow money, pay it on time, and stay in debt, then they really need to reevaluate their hiring criteria.

[Benson]

It's not that Dave's score is bad, it's that he doesn't borrow. If you don't borrow, you don't have a score. If you do the D.R. plan, then you will never borrow to buy anything, except maybe a 15 yr mortgage on a house if you absolutely need to. In that case, yes, a high score is good. Dave is not advocating being reckless with your credit score, but just emphsizing that once you are debt free and rely on cash only, you don't have to concern yourself with your credit score. You do not have to be a millionare to do this either. We make less than $25,000 a year and live on a cash-only budget and will be COMPLETELY debt free in a few more weeks. Debt and the I-Love-Credit-Score is only a tool to get more debt. If you do the D.R. plan, you pay the money you are borrowing and get out of debt and stay away from it! The way I see it, if you can't pay in cash, then you are living beyond your means (meaning, you spend more than you make, because if you weren't you wouldn't be borrowing money). Anyone who says that being debt free is not for them is living in serious denial and lacks financial discipline to WAIT to buy until they have the cash. Dave equates this to the little red-faced kid in the toy isle who "wants toys now!"

[FMF]

Benson --

Even if you never borrow a penny, you need a good credit score. Otherwise, you're paying too much for many services. An example:

http://www.freemoneyfinance.com/2008/09/how-we-saved-44.html