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A lot of bad advice for many people
on May 24, 2010
I bought Ramsey's book because he has so many raving fans (my daughter among them), and the loyalty they express is often literally evangelical in nature. Offering any criticism of Dave Ramsey's advice can draw fusillades of righteous indignation. Any negative comments about Dave Ramsey, Financial Peace University or any of the many products he sells may be answered by, "You obviously love debt," and "why are you so against living by Biblical principles?"
As a financial professional, I can legitimately claim to be an expert in matters of debt and credit. So I bought his book so I could see just what it was about Dave Ramsey would cause these extreme reactions. After reading it carefully, I have come to some conclusions.
First, I must acknowledge that there is a lot to like about Dave Ramsey. His basic teaching can be boiled down to this:
1. Don't buy stuff on credit that you can't afford
2. Set aside money for emergencies and the future
3. If you are in trouble with debt, stop incurring it (we could also state it as, "When you're deep in a hole, stop digging.")
4. Make a plan to retire your debt systematically
He offers a step-by-step method for getting out of debt and onto a better financial footing. He teaches that you should pay attention to your finances and work from a written budget.
These are all good things.
My first concern is that Mr. Ramsey teaches that All Debt Is Evil (with the possible exception of a 15 year mortgage). Others here have mentioned his assertion that "responsible use of a credit card is not possible." His audience is urged not only to pay off their debt (a Good Thing), but to cut up the cards and close the accounts.
As a mortgage lender, I can attest that this will destroy an individual's credit score and make securing a mortgage very difficult and expensive. Mr. Ramsey's simplistic answer to getting a mortgage without a credit score (or, more accurately, without any active accounts) is to "find a lender who does manual underwriting." The simple fact is that ALL mortgages are manually underwritten. It is possible to get a loan using "alternative credit" (rent receipts, cell phone bills, utilities, etc.), but these loans are, without exception, far more expensive than conventional loans. At a minimum, a borrower without any open accounts will have to resort to a government-insured FHA loan, which carries an up-front mortgage insurance premium of 2.25% of the loan amount, plus .55% additional insurance, paid monthly.
There are many instances of bad, even dangerous advice from Mr. Ramsey, often couched in terms similar to those found in 12-Step programs, expressed in his avuncular, folksy style. He makes liberal use of logical fallacy and outright false statements to advance his points.
I believe Dave Ramsey's appeal (and the vehicle that is earning him a reported $40 million annually) is to those who are desperately in debt, primarily because of their own bad habits. They are looking for any lifeline, and he offers them not only a method, but also encouragement to stick with their plan.
But for people who are NOT in dire straits, simply looking for a way to improve their financial lives, there are far better places to seek guidance than Dave Ramsey's simplistic, one-size-fits-all advice. Borrow one of his books or check them out at the library, read them critically and decide for yoursef whether my comments have any merit.