The Dave Ramsey view of credit cards is pretty simple: cut ‘em up. The Dave Ramsey view of paying off credit card debt, called the “Debt Snowball”, involves paying off credit card debt in order from the credit card with the lowest balance first and then working up to the credit card with the highest balance. I am a huge Dave Ramsey fan and agree with 95% of what he says but each of these two Dave Ramsey credit card strategies are just flat out wrong. Here is why.
ISSUE #1: “Cut Up All Credit Cards”
In a fairly recent post on DaveRamsey.com titled “The Truth About Credit Card Debt” (emphasis on the quotation marks) Dave makes the following remarks: “Responsible use of a credit card does not exist… There is no positive side to credit card use.” Ramsey attempts to back up these wild claims by pointing out a study of credit card use at McDonald’s that found that customers who paid with a credit card spent on average 47% more than those who paid with cash.
There are numerous problems with both the logic behind Dave Ramsey’s “don’t use credit cards” assertions, the numbers, and of course the McDonald’s study that he relies upon to back up his beliefs. Here are some of the major problems with Dave Ramsey’s approach to credit cards:
Debunking the McDonald’s Credit Card Study
The McDonald’s study on credit card use does NOT prove that people will spend more money than they ordinarily would when paying cash but rather what it proves is that quite naturally when people make smaller purchases they tend to use cash and when they make relatively larger purchases they tend to use a credit card.
Ask yourself these two questions:
“If a family with 3 kids walks into a McDonald’s and buys dinner for 5 people (average cost between $30 and $35 in total) then is it more likely that the Dad will whip out a wad of cash and pay or is it more likely that he will just plop down his credit card?”
“If a teenager walks into McDonald’s and buys a double cheeseburger and a Coke from the dollar menu (average cost of $2) then is it more likely that they will hand the cashier $2 to pay for the food or is it more likely that they will hand over a credit card to pay for a measly $2 purchase?”
Just as one might suspect, most people rarely like to carry a large amount of cash on them and once the purchase price of whatever they are looking to buy increases above the $5 or $10 or $20 mark then most people will typically use their credit card to make the purchase rather than depleting their likely small stash of cash that they have in their pocket.
In other words, Dave Ramsey and others who have cited this study extensively are drawing entirely the wrong conclusion. In fact, the conclusion drawn by Ramsey is exactly backwards. Ramsey attempts to say that the study proves that when people use their credit card the actual use of the credit card causes them to spend more when in fact what the study points out is just the rather obvious truth that when people are about to make a relatively larger purchase they tend to prefer to use a credit card because they do not like to carry a lot of cash around or use up what little cash they do have in their pocket that they may need for an emergency, etc.
The truth is that the larger purchase causes the customer to use the credit card and NOT that the credit card causes the customer to make the larger purchase!
Yes! Actually, You CAN Use Credit Cards Responsibly!
OK, now that I have hopefully cleared up the misguided conclusions that many seem to infer from the McDonald’s credit card spending studies I would like to move on to also debunking Ramsey’s statement that, “Responsible use of a credit card does not exist… There is no positive side to credit card use.” (Note, that regardless of what conclusions you draw from the McDonald’s study this section should still prove that you can use credit cards responsibly, you should use credit cards responsibly, and many many people do use credit cards responsibly).
Red Herring Alert!
Ramsey states: “Now let’s talk about the rebates. If you were using a credit card at 5%, you would have had to have spent $80,000 to get $4,000 rebates on new cars that lost $6,000 of value when you drove them off the lot. That is not a good deal!” (Source)
First of all, I am not entirely sure what he means when he refers to the depreciation of new cars because obviously one can use a credit card to buy pretty much anything and not just a new car (which I personally don’t think I would ever do in the first place because of the initial depreciation hit that comes with being the first owner of a new car but that is a rabbit trail and a subject for another day). I will ignore the confusing (to me at least) new car depreciation remark because I am not really sure what conclusion he is trying to force the reader into making since the inference that credit cards can only be used to buy new cars can’t possibly be what he means (if I am missing the point entirely on this one then please point it out for me in the comments below and I will amend this section to include your comment). UPDATE: Thanks to Alfred who explains in his comment below what Dave is getting at with this statement and I of course still stand by my pretty obvious statement that you can buy pretty much anything with a credit card and not just a new car!)
Numbers Don’t Lie
Putting the new car depreciation red herring issue aside let’s take a look at the numbers because numbers don’t lie. Numbers don’t always tell us what we want to hear and they don’t always make for compelling radio/TV or result in bestselling book deals and guest appearances on the Today Show BUT numbers don’t lie.
Here is how I look at it. I can use my Bank of America debit card to make a purchase and I can pay 100% of the purchase price OR I can use my American Express Costco True Earnings Credit Card with no annual fee and I can receive cash back of at least 1% and up to 3% on all purchases to effectively end up paying anywhere from 97% to 99% of the purchase price rather than the full 100% that I would pay with my debit card or by using cash.
I schedule my credit card to be paid off in full automatically every month direct from my checking account so I never even have to worry about logging into my account or mailing in a check or making sure to get the payment in by the due date. I essentially treat the credit card just like a debit card except for I receive the cash back as well as the convenience and fraud protection that comes with using a credit card and not having to carry large amounts of cash everywhere I go.
Don’t Take My Word For It! (Calculate Your Own Potential Cash Back Savings)
1% to 3% cash back may not seem like much at first but as you can see by inputting your monthly spending habits into our cash back credit card calculator that amount can grow to enormous proportions after even 1 year and of course after 25 years! Just imagine if you started using a cash back credit card after the birth of your first child and then just saved the money from all of those cash back checks. By the time your child is of college age you would likely have enough to pay for at least the first entire year of college! (Don’t take my word for it – enter your own monthly spending amounts into the cash back credit card calculator and see for yourself – AND keep in mind that the 25 year projections from this tool are on the low side because the tool doesn’t even take into account the rate of growth that your cash back savings could have if you would keep them in an interest bearing or investment account!)
Why Pay Full Price?
All in all, it seems kind of silly at best and a downright bad steward of my money at worst to NOT use a credit card and pay 100% of the cost of something rather than the 95% to 99% of the full price that most cash back cards will give you (the 95% number is from the Discover More Credit Card that offers up to 5% cash back in certain categories that rotate on a quarterly basis although my personal favorite is the American Express Costco True Earnings Credit Card because I don’t like having to keep track of rotating categories and American Express is accepted at more places than Discover currently is).
ISSUE #2: “Debt Snowball”
I think that the Dave Ramsey Debt Snowball approach to paying off credit card debt is a great plan EXCEPT for I certainly take issue with the advice to, “You should pay off the smallest debt first to create the greatest momentum in your debt snowball.” (Source)
The best approach to take is of course to pay off the credit cards in order from the card with the highest interest rate down to the credit card with the lowest interest rate and NOT to pay off the credit cards in order from the card with the lowest balance to the highest balance. Why? This is true because the credit cards with the higher interest rates are costing you more in interest charges every month then the credit cards with the lower interest rates and so you will save money in interest charges by first tackling the payoff of the credit cards with the highest interest rates and then moving on down to the lower interest rate credit cards.
Again, you don’t have to take my word for this because all you have to do to see the numbers for yourself is to use our Credit Card Payoff Calculator to see the sometimes dramatic effect on your monthly payment and interest costs that even a 5% to 10% different in interest rate can have.
I Still Love Dave Ramsey’s Financial Peace University!
Although I have never gone through the Dave Ramsey Financial Peace University personally I have hard many good things about it from people I trust and I have reviewed many of his teachings online and have come away impressed. Yes, I still strongly disagree with Dave Ramsey in the two areas above but don’t let that stop you from putting into practice a lot of the top notch stuff that Dave Ramsey puts out there.
Let this simply be a reminder to always do your own research, be a smart and disciplined consumer, and to never just take advice at face value even from someone who is as respected and trusted as Dave Ramsey because we are all human and we all get things wrong from time to time!
What do YOU Think?
What do you think about Dave Ramsey’s view of credit card use?
What do you think about the Dave Ramsey Debt Snowball approach to paying off credit card debt?
Am I being too harsh on Dave Ramsey or am I right on the money?
BONUS: Dave Ramsey Video
Just to show that I am still a big Dave Ramsey fan I hope that you enjoy the below video of Dave Ramsey flipping out on NBC’s John Yang after Yang’s feature on the government giving tax deductions to universities. Ramsey is highly critical (and rightly so) of the socialist mindset that has crept into American thinking and exemplified by Yang. Well worth watching.
- Dave Ramsey on Debt Negotiation & Debt Settlement – Wrong Again?
- Forgive Us Our Debts: The Debt Counseling Experiment – Part 2
- Why the “Reverse Robin Hood” Credit Card Study is a Load of Crock
- What are some tips to manage credit card debt?
- Interview with Peter Anderson of BibleMoneyMatters.com
- How do I get out of credit card debt?
- Credit Cards, Overeating, & the Credit Card “Blame Game”