Dave Ramsey Questions

[sdzimm]

Thanks to the people on this board I purchased a Dave Ramsey package a few months ago. I have been doing a quasi budget thing on my own, but honestly, it was not working.

A thread on here the other day, basically about what 'really makes something affordable' prompted me to finally open the package. I finished the book, I am VERY glad I bought it, and I am ready to begin the process. I do have reservations though, specifically going COMPLETELY credit free.

For those who have completed the program.. after eliminating all credit debt and living credit free by choice- have you needed to apply for ANY loans since cutting the FICO chain?

And if you did apply, where you successful in securing a loan?

I am willing and excited about cutting the credit ties. However, I cannot predict the future, and maybe my emergency fund will not be large enough to cover what comes up. ( new mortgage, car, etc.)

So please share with me how it worked for you.

 

[DawnM]

We are out of debt other than our mortgage.

We have been debt free for over 3 years now.

Last year we refinanced from a 30 year to a 15 and cut our interest by over a point.

They ran credit scores and DHs and mine were in the high 700s without any problem.

The only time (I am pretty sure) it would be effected is if you get down to NO debt, even mortgage and you haven't taken out a loan for many, many years. But I don't see how that could even be a problem if you have steady income.

Dawn

 

[bettymae1121]

Short term it won't be a problem, because it takes about 7 years or so for things to drop off your credit report. Let's say you pay off a car loan this year. That paid off loan will be on your reports until 2017. Your mortgage will also stay on your reports for about 7 years after pay off.

After most of your accounts have fallen off your reports though, that's when you may run into problems with certain things. Some employers run credit checks before they will hire you, and some insurance companies use credit scores to set insurance premiums. If you have no credit or low credit do to not having much, if anything, on your credit reports, this could cause you some issues.

But that is very far down the road, right now just concentrate on getting out of debt. As your balances go down, your scores will actually go up for a time as your debt-to-limit ratio goes down. You'll only need to worry about your score about 7-8 years after the bulk of your debt is paid off. At that point you can see where things stand and decide what, if anything, you need to do about it.

 

[TobiasFunke]

We finished paying everything off about a year and a half ago. Since then we have not touched a credit card or a loan. We are paying for everything in cash and it feels great to not have to owe someone else.

 

[DawnM]

Good to know.

What about if one were to use a CC for small purchases a couple of times per month and pay it off each time, would that help with keeping your credit?

The system is flawed severely if you have to keep debt to have a good credit score.

Dawn

Short term it won't be a problem, because it takes about 7 years or so for things to drop off your credit report. Let's say you pay off a car loan this year. That paid off loan will be on your reports until 2017. Your mortgage will also stay on your reports for about 7 years after pay off.

After most of your accounts have fallen off your reports though, that's when you may run into problems with certain things. Some employers run credit checks before they will hire you, and some insurance companies use credit scores to set insurance premiums. If you have no credit or low credit do to not having much, if anything, on your credit reports, this could cause you some issues.

But that is very far down the road, right now just concentrate on getting out of debt. As your balances go down, your scores will actually go up for a time as your debt-to-limit ratio goes down. You'll only need to worry about your score about 7-8 years after the bulk of your debt is paid off. At that point you can see where things stand and decide what, if anything, you need to do about it.

 

[bettymae1121]

Good to know.

What about if one were to use a CC for small purchases a couple of times per month and pay it off each time, would that help with keeping your credit?

The system is flawed severely if you have to keep debt to have a good credit score.

Dawn

You're right, it's nuts. But yes, having a credit card and paying it off each month would be one way to keep a postive account on your credit report, and keep your score up. Gas is a great way to do that, it's something you need anyway and paying at the pump is a great convienance. Groceries, utility bills (if they don't charge you a fee for using a CC) or any other usual monthly bill works well too. Have a major CC on hand is also good for things like renting cars (which is possible with just a debit card, but is more difficult), so there's that too. I personally feel that by the time people climb out of major debt, most have the disapline to keep a credit card on hand for things like this and not get into trouble again.

 

[weHEARTmickey]

We only owe our mortgage, & have paid for 1/2 of it in the 3 years since we bought our home. I drive a 2008 highlander & DH drives our old 2000 sienna van We know he will need a truck sooner or later, but we will pay cash for it when he does. Otherwise, we will just pay for any repairs needed. (He plans to drive it until it completely DIES!)

Dave's whole philosophy is getting rid of ALL credit b/c you don't need it to pay cash. If I remember correctly, he doesn't even HAVE a credit score b/c he's been without credit for so long. It's not such a bad thing. Like Dave reminds us: Proverbs 22:7 says "The rich rule over the poor, and the borrower is slave of the lender."

 

[minnie1928]

If I remember correctly, he doesn't even HAVE a credit score b/c he's been without credit for so long. It's not such a bad thing.

it's not such a bad thing for him because he won't be needing to apply for a job or an apartment any time soon. And, I'm pretty sure that his "status" also allows for him to get insurance and such.

But, for regular folks the reality is that credit scores are used for far more than simply getting credit. I am doing a modified DR and have been for nearly 6 years, so don't take this as me jumping on the anti-DR bandwagon. But employers use them, apartment managers, insurance issuers, etc.. I worked in banking and they ran credit reports randomly on existing employees, so not only was a good score necessary for getting hired...it was also needed to help retain your job.

My only debt is my mortgage, but I do use CC on a monthly basis and pay it off every month. The CC balances show up on my credit report because I always have a balance, even though I pay my balance in full. The timing of charges vs. payments vs. credit reporting is different.

 

[mom2faith]

I have a Visa that I use for Gas only. We get points and I pay it off every time I make a purchase with it. The points are adding up and we will fly for free for our 2011 vacation (whereever that may be) and I NEVER have a balance on it.

We have also used it for things that require a credit card - like plane tickets, rental car booking, etc. But once again, it is paid off right away.

Sadly, in this day and age, we could not live without it. We "need" it for travel bookings. So we keep it, and stay 100% on top of it.

 

[JDUCKY]

Good to know.

What about if one were to use a CC for small purchases a couple of times per month and pay it off each time, would that help with keeping your credit?

The system is flawed severely if you have to keep debt to have a good credit score.

Dawn

That's exactly how the system SHOULD work. If one cannot show good use of credit in a recent timeframe, why should one's FICO score be the same or higher than some who does?

If one closes all their credit cards and has no credit (not even a car loan or mortgage) and then they try to apply for a loan a few to several years later, they might run into problems or, at least, higher interest rates as that person is now more of a credit risk because they have not shown good use of credit recently.


Also, positive tradelines will stay on one's credit report for 10 years, not 7. Negative tradelines or derogatory information will drop off typically after 7 years. Some will stay longer (for example, bankruptcies will remain for 10 years and liens could remain indefinitely)

 

[bettymae1121]

it's not such a bad thing for him because he won't be needing to apply for a job or an apartment any time soon. And, I'm pretty sure that his "status" also allows for him to get insurance and such.

But, for regular folks the reality is that credit scores are used for far more than simply getting credit. I am doing a modified DR and have been for nearly 6 years, so don't take this as me jumping on the anti-DR bandwagon. But employers use them, apartment managers, insurance issuers, etc.. I worked in banking and they ran credit reports randomly on existing employees, so not only was a good score necessary for getting hired...it was also needed to help retain your job.

My only debt is my mortgage, but I do use CC on a monthly basis and pay it off every month. The CC balances show up on my credit report because I always have a balance, even though I pay my balance in full. The timing of charges vs. payments vs. credit reporting is different.

Ditto. Multi-millionaires can afford to have a crummy credit score, the average joe...not so much.

DR came on to the scene (that I'm aware of at least) less than 10 years ago. The ones that first started his program and that have been debt free haven't yet had to worry about low scores yet, since their old accounts are likely still on their reports. I think it will only be in the next 5 years ago that the ones that have truely ditched credit like Dave says they should may begin to run into problems. It may not be insurmountable for most people, but since it is so easy to maintain a decent score without debt, why make it harder than it needs to be?

ETA: I'm not a DR hater, I think overall his advice is good. I don't think CC's need to be avoided once one's debt is under control (unless someone truely has a shopping additiction and a CC is just too temptig) and I don't like his advice about not caring about your FICO. Credit scores are more than just for borrowing money these days. We don't have to like it, but if we want to be employed or want to have a decent car insurance rate, unfortunately the game needs to be played. But you don't have to be in debt, just pay the bill in full when it's due and you get the best of both worlds. A decent credit score and no debt (and mayben a few airline miles too!).

Another ET: JDUCKY...I thought both negative and positive tradlines stayed on for 7 1/2 years, I guess you learn something new every day!

 

[BrightScouter]

So, if a current or prospective employer tries to get a credit score on you, it would have to be a hard credit inquiry, correct? Then those should show up on your credit report if you check it. I just changed jobs and nothing has shown up on mine. And I worked in banking for almost 20 years and even then I never had any credit check show up. I guess I may just have been lucky.

I think if you can control your credit card usage, you don't really need Dave Ramsey's priciples anyway. If you can't control it, then you need to live by them until you can. If that ever happens. I suppose if you got totally debt free, it might be worth keeping one card and using it once every few months. But if you can't control it, get rid of it. If you can, no problem keeping it.

 

[bumbershoot]

OP, I find it easier to not think of the very end of the line right now...for now, just get a budget going. Check out llnoe.com (aka living like no one else .com) and see "real world" people and how they are living... OK not that the people here aren't real world, LOL, probably most who replied here (including me) are over there. But there's just MORE over there.

DH opened a CC at the end of '08, after not having one since, hmm, the early 90s. It was offered, so he took it. (and because eh hadn't made the *choice* to go CC-free in the 90s, he promptly goofed and got us into a mess! sigh) We actually still have that CC so he has a backup for work trips (he has a corporate AmEx, but not all places take that card)...he can't think about dumping it at this time. So...we continue along without getting rid of the thing.

And he had "neutral" credit. If DR has only been doing his thing for 10 years, well, DH went longer than DR did, and he could still get credit. Not at pretty interest rates (case in point being the 20.25% interest car loan he got from Chase in '07, that DR helped us figure out how to pay off 2 years early), but he got it (and the CC after that).

We have to remember the other things that can help with credit...utilities, for instance. Unless DR has someone else paying his utility bill, he still does have something out there that's "credit"...


Anyway, for now, work on the budget. Account for all money. Tell your money where to go, before it goes. That's the start. Everything flows after that.

 

[JDUCKY]

So, if a current or prospective employer tries to get a credit score on you, it would have to be a hard credit inquiry, correct? Then those should show up on your credit report if you check it. I just changed jobs and nothing has shown up on mine. And I worked in banking for almost 20 years and even then I never had any credit check show up. I guess I may just have been lucky.

I think if you can control your credit card usage, you don't really need Dave Ramsey's priciples anyway. If you can't control it, then you need to live by them until you can. If that ever happens. I suppose if you got totally debt free, it might be worth keeping one card and using it once every few months. But if you can't control it, get rid of it. If you can, no problem keeping it.

No, those are typically "soft pulls". My newest employer's shows up as a soft for me.

Things like AT&T or DirecTV or a utility company could show up as either a hard or a soft.

Also, any active creditor can, at any time, pull a hard inquiry.



edit: there's also things like this, though:
http://newsblogs.chicagotribune.com...aw-bans-employer-credit-checks-in-hiring.html

 

[LovableGluttons]

When I accepted my current position in 2007, I warned my employer about my credit report. I don't agree with FICO being used to determine is fiscally responsible as shuffling loan and credit card balances is not an accurate predictor of trustworthiness and good judgement. I work in healthcare, human lives depend on my abilities. My skills as a professional have nothing to do with my personal choice not to owe people money.

 

[sdzimm]

Thanks for the replies. I posted the question prior to doing a snowball estimate. After seeing I could be debt free (excluding the mortgage) I have decided to go for it. Like many of you have stated, getting started is the most important part.

I will worry about my FICO later. The number will get better in any case.

 

[DawnM]

So one SHOULD be penalized for being far more financially responsible than those who take out interest loans to allow someone ELSE to get rich?

No, I still think it is flawed.

Dawn

That's exactly how the system SHOULD work. If one cannot show good use of credit in a recent timeframe, why should one's FICO score be the same or higher than some who does?

If one closes all their credit cards and has no credit (not even a car loan or mortgage) and then they try to apply for a loan a few to several years later, they might run into problems or, at least, higher interest rates as that person is now more of a credit risk because they have not shown good use of credit recently.


Also, positive tradelines will stay on one's credit report for 10 years, not 7. Negative tradelines or derogatory information will drop off typically after 7 years. Some will stay longer (for example, bankruptcies will remain for 10 years and liens could remain indefinitely)

 

[friskykitten]

I know this won't tell you anything about the future-future. But we have been able to live without using a credit card for almost a year and a half now with no problems.

We also have not had to use a CC for travel. Our debit card has worked just as well as any credit card we used to have for reservations, etc. We may not get the extra "insurance" coverage that most credit cards grant (I have not checked on this) for car rentals and such but we havn't had a need for it either.

I don't see us ever being completely without credit. We still have a car payment and are finishing up one other loan that will be complete in November. Even if we decide to not have a car loan in the future I will probably then keep a credit card for small purchases just to keep the credit score "active".

I wonder if the future may hold some different practices on how lenders dole out credit. With so many people with damaged credit scores, some lenders or those who check credit scores are looking at things in a different light. For example, some friends of ours who own rental properties are still running credit checks on prospective renters. But they are evaluating the credit reports differently. They are looking at the damaged scores, passing over them and looking to see instead if the damage was due to a little bump in the "credit road" that may be due to the economy/illness/etc. or if the credit problems have been a repetitive habit over the past 7-10 years. If it looks like that person had good credit practices in the past, had a bit of credit problem due to a finanacial hardship of some sort, but looks to be back on the road to good practices again then they are granting them the chance to rent their homes. Will banks and other institutions follow this line of thinking in the future? Maybe.......maybe not. Only time will tell.

DR does not need credit like the average individual because he makes millions from his books/radio programs/financial seminars etc. If we all had that kind of cash flow we would be fine without credit too. Although he has some great ideas that we have put into practice, DR is not the only method that we use.

 

[momoflizandains]

Great thread! We started DR this month after writing everything down for a couple of months to develop a budget. I am much more aware of everything now. Frankly, my main concern right now is getting out of debt; I really can't grasp the concept of being totally debt free.

 

[moongirl]

I am willing and excited about cutting the credit ties. However, I cannot predict the future, and maybe my emergency fund will not be large enough to cover what comes up. ( new mortgage, car, etc.)

So please share with me how it worked for you.

Your emergency fund is for emergencies not mortgages or car loans. You should have a line item in your budget for saving for your next car and for home improvements. Your emergency fund should be for things like covering your deductibles if you are in an accident or a tree falls on your house, not for buying your next car or for remodeling your bathroom. The main reason for having an emergency fund is to cover basic expenses in case of a job loss, disability, or medical emergency.

You can absolutely keep a credit card IF you pay it in full each month AFTER you FIRST stop using it and pay off all of your debt. After you are out of debt, build up your emergency fund and your next car and home improvement funds.

Good luck!!