What Does Dave Ramsey Say About Credit Cards?

Dave Ramsey is a widely recognized financial expert known for his straightforward approach to personal finance, often advocating for a debt-free lifestyle. His philosophy emphasizes financial independence through diligent saving and the avoidance of borrowing money. He views credit cards as counterproductive to building wealth.

Ramsey’s Stance on Credit Cards

Dave Ramsey maintains a firm position against the use of credit cards, primarily viewing them as a mechanism that encourages debt and overspending. He argues that credit cards make it easy for individuals to spend money they do not possess, often leading to accumulated interest charges that increase overall debt. This can trap people in a cycle of continuous debt.

From his perspective, a credit score is not a reliable indicator of financial success, but rather an “I love debt” rating, as it is entirely based on an individual’s borrowing history. He asserts that a high credit score primarily signifies a history of borrowing, not necessarily a healthy financial position. Ramsey believes that individuals can navigate their financial lives successfully without needing a credit score.

Steps for Eliminating Credit Card Debt

For those currently holding credit card debt, Dave Ramsey advises a decisive approach to eliminate it. He suggests physically cutting up credit cards to remove the temptation of further use and to signal a commitment to becoming debt-free. The primary method he advocates for debt repayment is the Debt Snowball.

This strategy involves listing all debts from the smallest balance to the largest, regardless of their interest rates. Debtors are instructed to make only the minimum payments on all debts except for the smallest one. All available extra funds are then directed towards paying off the smallest debt with intense focus. Once the smallest debt is fully paid, the money previously allocated to it, along with its former minimum payment, is then added to the payment for the next smallest debt. This process continues, building momentum as each debt is eliminated, which Ramsey emphasizes is more about behavioral change and motivation than mathematical optimization.

Managing Finances Without Credit Cards

Living without credit cards, according to Dave Ramsey, involves adopting specific financial tools and habits. He strongly advocates for the use of cash and debit cards for all daily transactions, ensuring that spending is limited to money already possessed. Budgeting becomes a central practice, with a focus on telling money where to go before the month begins, rather than tracking where it went.

For larger purchases, such as vehicles or homes, Ramsey encourages saving cash to avoid loans and interest. He suggests continuing to make “car payments” to oneself into a savings account after a car is paid off, allowing for future cash purchases of vehicles. When it comes to homeownership without a traditional credit history, Ramsey suggests seeking lenders who offer manual underwriting, where financial stability is assessed based on income and payment history documentation rather than a credit score. Establishing an emergency fund of several months’ worth of living expenses is also a key component, providing a financial safety net instead of relying on credit for unexpected costs.