Review: How Does Dave Ramsey Improve Credit Scores?
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Dave Ramsey is one of those people who wants to help you to better your financial situation. He is a financial author as well as a public speaker. He also has a syndicated radio program that is quite popular and has even been featured on numerous television shows because of his financial expertise.
Ramsey even created a program to manage finances called the “Financial Peace University” or FPU. This program is integrative and involves small group discussions, live classes, a book, and even video teaching. His classes are accessible online for maximum convenience.
He also has a book entitled The Total Money Makeover that is meant to provide an introduction to some of the concepts that he brings to all of his lessons. The goal is to create a healthier financial situation and to lessen the dependence on credit scores.
How Dave Ramsey Improves Credit Scores
The program that Ramsey offers, titled “The 7 Baby Steps,” is meant to improve finances, reduce debt, and improve your credit. Ramsey’s seven steps are all very simple in nature and, in theory, easy to follow with some discipline.
The first is to have $1000 saved in your emergency fund as soon as you can. To do this, it will mean no excessive spending on things that you won’t or don’t need. This is a problem for a lot of people, whether it is due to eating out, entertainment, or a list of other things.
He advises that you take the measures necessary to get to $1000 in short order, even having things such as a garage sale if necessary. The goal here is to get that $1000 and put it away as soon as you can so that you have the foundation built. By doing this, you commit to living on a budget and make it easier to follow through with the remainder of the steps.
While some would argue that $1000 is not enough to cover your entire living expenses in the event of an emergency, that is not the point. The point is to establish budgetary habits so that you can more efficiently manage your money.
We will talk more about true emergency finances later, but hitting that $1000 milestone shows you not only that it is possible to save money but that you can be responsible with that money. These are important building blocks for establishing a stronger financial foundation and it will be difficult to advance forward without those building blocks.
His next tip is that you should pay off your debt using what is known as the snowball method. This method is arguably the best way to get rid of debt that you may have. The idea here is that you pay off your debt with the lowest balance first.
When you pay that off, take what you would have paid toward that debt and put it towards another monthly debt. Continue this method until you have gone through and knocked out all your debt. This is known as the snowball effect and the idea is that before you know it, your debt will be wiped out in a far shorter time period than it would with another method.
Ramsey also advises that you save around three to six months’ worth of expenses in order to further build your emergency fund. This is actually a common suggestion in the event of job loss or any kind of disaster.
This fund has another impact: you no longer depend on credit cards. The idea is that you will have cash in savings to cover any emergency and won’t depend on your credit cards for those emergencies. That keeps you from getting into debt once again.
Next, he recommends that you invest at least 15 percent of your total household income. This can be done using a Roth IRA retirement account. According to Dave Ramsey, you should have all debt other than a mortgage paid off. Investing that money in a retirement account can allow you to get the jump on retirement planning.
If you have kids, it is never too early to begin saving for their college tuition. This can be done through 529 plans and Education Savings Accounts (ESAs). Ramsey recommends that you do not use savings bonds, insurance, prepaid college tuition or zero-coupon bonds for this step in the process.
The second step from last is to pay off your home. A mortgage is the largest investment that most of us will make and when you get to a point where you have credit cards and other debts paid off, you should be focused on paying down your mortgage.
Most of us have a 30-year mortgage; paying extra each month will go towards the principal and save you a ton of money in interest rates. This will help cut down on your total debt and this should be the last debt that you will have to pay in your lifetime.
The last step is to build your wealth and share it. Theoretically, with all of your debts paid off in that order, you will have money to spare and can begin building wealth. But the goal isn’t to harvest it all; you should share the wealth wherever possible and help others experience success.
Why Dave’s System Works
This system has proven to be successful because it does not sugarcoat the point. It isn’t an overnight process and it isn’t guaranteeing that you will get rich in an instant. It is a plan that promotes discipline and an eye towards the future.
Most of all, this plan has steps that are easy to understand. There is no complicated system to adhere to; it is just a matter of starting with your smallest debt and building up. It isn’t a quick fix. It is a lifestyle change.
You will learn to better manage your money, to be responsible and use a budget, and to eliminate unnecessary spending. Best of all, being able to go through this system leads to less of a dependence on credit. Yes, it is there should you need it but outside of necessary debt (such as a mortgage), the system is meant to keep you away from getting into the debt hole that so many others have fallen into.
Simply put, it is reasonable. There is a belief that you should pay off your highest interest cards first but the difference will result in minimal dollars in lost interest. Either way works; the idea is that you need to focus on paying off a debt and do it before moving on to the next.
Foresight helps and saving for important life events such as buying a home can make those major events a little easier to deal with. Having more money down, for instance, can make buying a home that much easier than it would have been with a smaller or no down payment.
Building Wealth Without a Credit Score
One of the great things about Dave’s system is that it doesn’t necessarily focus on improving your credit score but it will. His focus is instead on developing better spending habits and reducing (and eliminating) debt.
Many of us tend to focus on the credit score and think about the things that we can’t get when our scores are low or bad. Instead, he wants you to try to think about what you could afford if you managed to get out from underneath those balances and eliminated your monthly payments.
The simple fact is that many of us tread water because we are making minimal payments. Yes, it is good enough but it also keeps us mired in debt and doesn’t really do anything for our credit long-term other than establishing a quality payment history.
The idea is to create your own opportunities. Eliminating money that would have been sent on a monthly basis to creditors means more money in your pocket to do the things that you wanted to do. Instead of having to borrow for a vacation or a major purchase, the goal would be to save that money yourself when not having to pay down credit card balances.
Carrying zero debt is the crux of his method. It sounds as if it would be an easy thing to do but for many of us, it isn’t quite so easy. Having a plan in place that maps out what we should be doing is the key. Know where to make the greatest impact with your money and begin paying down those debts. That is the path to financial freedom and a much better credit score.
Improving Your Credit Score
Ramsey’s method is ideal because of the simplicity of implementing it as well as the fact that all of these traits reflect well on your credit report. When you make your payments on time and carry little to no debt, it reflects positively in the eyes of lenders.
Dave suggests paying your bills on time. This may seem like a no-brainer but more people than you realize fail to do this. It has a negative impact on your credit score, results in additional fees and charges that need to be paid off, and keeps you in debt longer than you need to be.
Even beginning a positive trend with a couple of on-time payments is good for your credit history. The key is to not let a late payment discourage you. Also, he suggests calling your creditors to see if they can make a change to the amount that you owe each month or if they can waive a late fee that you may have incurred. The key is to call and ask because asking never hurts.
Above all else, paying off your debts is of the utmost importance. Carrying a credit card balance is okay but far too many of us have well above the 30% credit utilization ratio that is recommended by the major credit bureaus out there.
You can spend a little here and there but make sure that you pay off the balance of your card each month. This keeps your mandatory payment as low as it can be and allows you to focus those funds elsewhere if you should choose.
Another major important factor that Dave Ramsey recommends is that you monitor your credit scores. If you don’t keep an eye on your scores, you won’t know when something is wrong. Know where you stand, know what you can improve, and check for inaccuracies.
That’s right; you can dispute items that you think aren’t accurate. Instead of letting that mistaken reporting damage your credit score, you can call to have it verified. If it is inaccurate, you can have it removed by the bureau. This way, it doesn’t do unjust damage.
Not only that, but identity theft is a very real and present danger, especially in today’s technological climate. Keep an eye on your reports in case there is any fraudulent activity that could damage your financial health.
There are parts of his program that aren’t so black and white and definitely require discipline. It also takes into account optimal scenarios, such as investing. Saying that you should get a certain amount back in your investments is easy to do but it isn’t guaranteed.
Simply put, there are safe investments out there but they have lower returns. And with the products that have higher returns, there is a much higher chance that you could lose your money. Keep that in mind when you do invest because you may be disappointed when you see that your returns aren’t quite where you thought they would be.
The key with investing in retirement is to get an earlier start. This way, you can take a neutral or even conservative approach. This may not result in the highest possible gains but it will insulate you against losses and keep your growth steady over a long period of time.
Dave Ramsey is also an advocate of completely getting rid of credit cards. And while that’s a good idea for someone who isn’t terribly responsible with them, just getting rid of them can cost you some money.
There are plenty of credit cards out there today that offer rewards in one way or another. This can be a percentage back on groceries, entertainment, gas, food, and so on. For instance, it might be a good idea to put groceries — which you will already have a budget for — on your credit card that gives you cash back for those purchases.
The idea here is to take advantage of these rewards programs and maximize the amount of money that you save. Sure, without credit cards, you avoid getting into debt, racking up huge interest fees and balances, and falling into the hole.
But if you are financially responsible, a credit card can be a great tool to not only build your credit history and score but also to save money with, thanks to cash-back features. Take a look at your cards first and see where you can benefit the most before just paying them off and cutting them up.
Dave Ramsey earned the title of financial guru because he gives sound, logical advice. His strategy isn’t ground-breaking; it provides a simple, guiding hand to those who don’t have the financial responsibility on their own.
By offering a simple plan that can be followed by everyone, Ramsey creates a plan that feels approachable and not as if it is a tall ask. That alone is what most in financial trouble need to get going down the right path, possibly for the first time in their lives.
He also preaches that it is not an overnight fix. Too many look for an instantaneous fix that will change their fortunes overnight, transform their financial situations, and improve their credit scores for the better.
But patience is the reality. Be willing to take the time to pay down your debts one by one and gradually improve your credit score and financial history. It may not be pretty and it may not be the quick fix that we would all love but it is effective.
Dave Ramsey’s plan is about establishing financial responsibility. While the changes don’t occur overnight, they can be long-lasting if done properly and shown a little bit of patience. And that is what people looking for these plans need the most: financial planning.
It is never too late to get out of debt or to learn to be financially responsible. Starting at step one is something that anyone can do. Building those responsible traits is within all of us; it just takes a little bit of coaching and nudging to bring out.
Dave Ramsey’s system may not be reinventing the wheel but it certainly shows us how to more efficiently use it.
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