Many of Ramsey's arguments against credit cards don't make sense, but this one might.
Dave Ramsey is a well-known advocate of living a debt-free life and he has made clear repeatedly he does not believe you should use credit cards -- even rewards cards that give you cash back, points, or miles for your purchases.
Many of Ramsey's reasons for steering clear of cards don't make much sense.
He's argued, for example, that you don't need a credit card to build credit because you shouldn't care about your credit score (which is simply untrue, as your credit score is used in all sorts of transactions). He's also said earning rewards isn't worth it because so many go unused (also a bad argument, since you can simply choose to use your rewards).
There is, however, one good point he makes. And, while his reasoning won't convince everyone, it's the best argument he's made for steering clear of rewards cards.
Here's what Ramsey had to say about one big downside of rewards cards
Ramsey's best argument against using rewards cards is that these cards end up perpetuating a system that preys on people who are struggling financially, need credit to get by, and get stuck paying the exorbitant interest rates that credit cards charge.
"Part of what pays for your rewards is the interest payments from other people," Ramsey said. "The 40% of people who don't pay off their balances each month and get slapped with interest payments are the ones paying for your rewards…And why can't they pay their balance at the end of the month? We don't know. Maybe a family has a medical bill pop up they can't cover because that month's budget is already too tight. Maybe a single mom is scraping by, holding her breath every time she swipes her card at the grocery checkout."
Ramsey's argument here is that by using credit cards to earn rewards -- even if you pay your balance in full -- you're enabling the credit card companies to persist in operating under a business model where they charge high rates (often 17% or higher), and high fees from those who can least afford it.
The system essentially transfers assets from poor people who can't afford to pay their balance in full to wealthier people who are able to benefit from rewards while paying their balance in full without interest costs. And, if you earn rewards, you're benefiting from this transfer of wealth.
Should you give up using rewards cards for that reason?
While Ramsey definitely has a point about how the credit card rewards system works in favor of those who have more, ultimately this is true of many aspects of the financial system. The government subsidizes wealthier people in the form of a mortgage tax deduction, for example, while banks pay interest to those with money and collect fees from those with too little who overdraft their accounts.
Even if you don't like the way this system is set up, deciding not to participate in it comes at a cost to you. You may decide you're willing to pay the cost of forgone credit card rewards because you don't want to help the card companies earn more profits. Or, you may decide to take advantage of the perks that are likely to continue to be available no matter what your personal preferences. But, whatever your choice, at least this Ramsey argument against rewards cards is worth thinking about -- unlike so many of his other reasons for steering clear of credit cards.
FAQs
Ramsey's argument here is that by using credit cards to earn rewards -- even if you pay your balance in full -- you're enabling the credit card companies to persist in operating under a business model where they charge high rates (often 17% or higher), and high fees from those who can least afford it.
What does David Ramsey say about credit cards? ›
But perhaps Ramsey's most absolute stance is that there is no responsible use of credit cards. There is no reason for anyone to use them. The rewards promised from credit cards are a mirage. You don't need a credit score.
Why does Dave Ramsey say you don't need a credit score? ›
Ramsey does not believe you need a credit score in order to purchase a home because "there are other ways to prove you pay your bills that don't require you to have debt or a credit score at all."
Do you think credit cards are a good thing or a bad thing? ›
High credit card interest rates — and how quickly they can result in mounting debt balances — are a downside of credit cards. But if you pay off your balance in full and on time, you can reap benefits like rewards and a strong credit score.
What is Dave Ramsey's opinion of the FICO credit score system? ›
Don't play the credit score game. Our culture worships at the altar of the FICO score, and we've got to stop it. It's a system invented by banks to make you think you need a high credit score in order to buy anything. That's NOT TRUE."
Why does Dave Ramsey not like credit card points? ›
According to a blog post from Ramsey Solutions, increased spending is one of the dangers of credit card points. If you want to get rewards, you need to spend money to get points. This means putting more of your money toward buying things you might not need, but need to buy so you can earn points and get rewards.
What does Dave Ramsey say is the most important thing to do? ›
Once you're free of debt and sitting on enough savings to survive at least a quarter of a year, Ramsey says the most important thing you can do with your paycheck is to save 15% of it — each and every pay period — in a tax-advantaged account.
Why did my credit score go from 524 to 0? ›
Credit scores can drop due to a variety of reasons, including late or missed payments, changes to your credit utilization rate, a change in your credit mix, closing older accounts (which may shorten your length of credit history overall), or applying for new credit accounts.
Why is my credit score only good when I have no debt? ›
Credit scores can be confusing, especially when you don't have debt. You might think that having no debt should mean you have a good credit score, but that is not the case. Credit score models influence your credit score, and debt is a portion of the model.
Why doesn t Dave Ramsey like debt? ›
Ramsey has made it clear that he doesn't think there's ever a reason to borrow because of the financial danger that being in debt presents. "Debt always equals risk, and it's always dumb," he said.
Credit score damage
High credit card balances relative to credit limits can significantly damage your credit score. This not only makes it harder to qualify for new credit but can also lead to higher interest rates on other forms of borrowing, such as mortgages or auto loans. And the ripple effect can be profound.
What are the pros and cons of using a credit card? ›
Credit cards offer several benefits – like reward programs, security features, and an opportunity to build a positive credit history. But unfortunately, they also come with several drawbacks, like high-interest rates and the risk of accumulating a high debt-to-income ratio.
What is the greatest disadvantage of using credit cards? ›
Interest charges. Perhaps the most obvious drawback of using a credit card is paying interest. Credit cards tend to charge high interest rates, which can drag you deeper and deeper in debt if you're not careful. The good news: Interest isn't inevitable.
Does Dave Ramsey believe in credit cards? ›
Dave Ramsey is a well-known advocate of living a debt-free life and he has made clear repeatedly he does not believe you should use credit cards -- even rewards cards that give you cash back, points, or miles for your purchases. Many of Ramsey's reasons for steering clear of cards don't make much sense.
Does Dave Ramsey really have a zero credit score? ›
Dave Ramsey said he let his credit score drop to 0, but there's actually no such thing as a 0 credit score. Having no credit can be a huge problem for most people.
Who has a perfect FICO score? ›
Less than 2% of Americans have a perfect credit score.
FICO is the scoring model most lenders use to check an applicant's creditworthiness. A perfect FICO credit score is 850, but experts tell CNBC Select you don't need to hit that target to qualify for the best credit cards, loans or interest rates.
What is the golden rule of credit cards? ›
Pay Off Your Balance
The golden rule of credit card usage is to do everything you can to pay off your entire balance each month. If you can do this, you won't be charged any interest.
What does Warren Buffett say about credit card? ›
Rule 7: Avoid Credit Card Debt
The idea behind investing is to earn interest, not to give it away. This is the basis of one of Buffett's rules of life.
What is the 525 rule for credit cards? ›
As rewards credit cards become more popular, issuers have implemented their own restrictions. Under Chase's 5/24 rule, applicants with 5+ new cards over the past 24 months will not be approved. The best way to sidestep this restriction is to apply for Chase cards before pursuing other issuers.
Do billionaires use credit cards or debit cards? ›
The credit card billionaires are most likely to use is the Centurion® Card from American Express, also known as the Amex Black Card, which has unique benefits and is reserved for high-net-worth individuals. Some of the rich and famous people rumored to have the card include Jerry Seinfeld and Halle Berry.
