How Following This Dave Ramsey Advice Could Hurt You Financially

Just because someone says something with confidence does not mean they are right. Key points Ramsey suggests allowing your credit score to go extinct. A credit score is the primary way lenders, landlords, and employers can tell how you’ve managed money in the past. Finding a lender who will underwrite a mortgage without a credit score may be difficult. There is no doubt that Dave Ramsey is one of the most popular financial gurus in the US But even with all his experience from him, Ramsey does not always get it right. Here are two examples of that. Where he believes he shines I get the sense that Ramsey believes he invented the notion of a debt-free life. He did not. I come from a long line of frugal farmers and country folk. You know what they have always avoided like the plague? Debt. My parents were so allergic to debt that they filled the house with used furniture, drove cars until the wheels fell off, and invested nearly everything they earned. I’m glad they lived that way because it meant that my mother could lead a comfortable life after my father died. My point is this: Dave Ramsey did not introduce the idea of ​​becoming debt-free to the world. He has simply used the loudest megaphone to spread the word and create a name for himself. And herein lies the problem The problem (as I see it) is that Ramsey — like anyone who works to create a following — starts with a good idea to attract a crowd, and once he has those people believing that his word is gospel, throws in some truly hideous advice. No one is perfect, and boy howdy, does Ramsey sometimes get it wrong. Shortsighted advice Here’s a piece of shortsighted advice recently offered by the owner of Ramsey Solutions: “Want to know how to improve your credit score? It’s simple: Pay off your debt, don’t add any new debt, and let your credit score dwindle until it’s completely extinct.” tell followers that they don’t need a credit score to buy a home, but more on that in a moment. What’s wrong with this advice Ramsey’s advice fails to take the following factors into account. Life happens Allowing your credit score to “dwindle until it’s completely extinct” might make se nse if you are certain you will never need credit in a hurry. However, life happens. Spouses leave, taking the financial assets with them. Serious illness hits, bringing with it sky-high medical bills. Businesses close, jobs are lost, houses burn to the ground. In short, while having the discipline to become debt free is wonderful, it does not insulate you from real life. Even if you have a hefty emergency fund, you can’t be certain that it will be enough to cover everything that comes your way. Adults should be able to trust themselves to do two things at once: Get rid of debt and maintain a healthy credit score. That way, if they’re ever in a position to need low-interest credit, their score will make it easier to land. Credit scores are not just for credit card applications While credit scores are used to qualify for consumer loans and credit cards, they have other uses as well. Let’s say your roommate gets a job in another city and moves out. You need to rent an apartment that you can afford on your own. You’d better believe that the landlord or management company is going to check your credit score as part of the application process. And what if a job you’re trying to snag involves managing money? It’s a safe bet that the potential employer is going to check your credit to learn how you manage your own finances before trusting you with theirs (employers can see pretty much everything in your credit report besides your actual score and birthdate). Extremes are rarely healthy Imagine telling someone on diet that once they’ve lost the weight they can never eat another piece of bread. It’s extreme and it rarely works. Balance is an important part of life, and it might be healthier to encourage those who’ve become debt-free to take control of their credit score rather than forget it exists. Another shaky piece of advice Here’s how Ramsey describes financial success to his followers: “As you build up your own financial security, you might see your credit score start to dwindle. But don’t freak out . . . That’s actually when it’s time to celebrate. And once those numbers vanish completely , that means you’ve made it.The real measure of financial success will be when your score reads undeterminable and you’ve got money in the bank, your retirement accounts are fully funded, and you’re living and giving like no one else Oh, and don’t worry about a credit score when it comes time to buy a new home. You don’t need a stinking credit score for that either (despite what people might tell you). There’s a process called manual underwriting that looks at the full picture of your fi nancial stability, rather than just your credit score. See? You can breathe easy.”How it can hurt youRamsey is right to say that it is possible to land a mortgage without a traditional credit profile. An FHA mortgage is normally available to first-time home buyers without a traditional credit score, and conventional mortgages , VA loans, and USDA loans may also be an option.But (and this is a big but), it can be difficult to find a lender willing to go the non-traditional route.The fewer lenders you have available to work with, the less competition there is for your business.In other words, lenders are not falling all over themselves trying to win your business.Can you blame them?They may be able to look at your bank account and investment portfolio, but they have no idea how well you’ve managed debt in the past.How are they supposed to know if you’re the kind of borrower who pays their debts as promised?The moral of the story is that no one gets it right 100% of the time. It’s up to you to weigh advice before following a charismatic leader down a rocky path. 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