Why Dave Ramsey is wrong about credit cards

Dave Ramsey is one of the loudest voices preaching the gospel of eliminating your debts on the road to financial freedom. I have several friends who have followed his suggestions to pay off their debt, manage their budgets and put themselves on a better financial footing.

But Ramsey gets a lot of things wrong.

Some take issue with his debt snowball method, wherein you get out of debt by paying off your smallest debts first. The method is completely wrong if you trust math, but it works for many people when considering how humans behave. His envelope budgeting system works well for some people, though I prefer not to keep large amounts of cash in the bank and manage my budget with a spreadsheet.

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.

What Ramsey says and how he gets it wrong

Having access to credit causes overspending


One of the biggest assumptions that Ramsey makes is that having access to credit causes you to spend more. And he can make his claims sound authoritative because he references a study conducted at MIT. But when you dig into the details, there is reason for skepticism.

The study looked at two groups of MBA students and their willingness to pay in a simulation that included auctions for baseball game tickets and a dinner gift certificate. Simulations involving a population with generally high disposable income making elective purchases probably don’t tell us much about how someone’s purchasing of groceries or gas might be affected by credit cards.

Simply having a credit card doesn’t increase how much gas your car takes or how much food your family buys at the grocery store.

If limiting access to credit helps prevent overspending on elective purchases, you should focus on setting a budget and monitoring your spending. Simply cutting off your access to credit cards will not solve an underlying spending problem. Worse, having an empty bank account when your electricity bill or rent comes due might tempt you to seek a more expensive form of credit, like a payday loan.

The truth is that credit cards are tools that can be used responsibly. Simply cutting up your cards is no replacement for monitoring your spending and setting a budget.

Related: Which budgeting technique is right for you?

You don’t ever really need a credit score

Ramsey claims that you don’t need a credit score to get a mortgage or car loan because some lenders will approve loans if borrowers provide alternate documentation of payment history and employment.

However, even Ramsey’s company admits that “getting a mortgage without having a credit score requires more paperwork” while characterizing it as “not impossible.” At the very least, not having a credit score means you will have fewer options and need to do more work to take out a mortgage or car loan. Additionally, not having a credit score could increase the cost you pay for private mortgage insurance or prevent you from receiving the best mortgage interest rates. Both of these points seem to be missed by Ramsey and his team.

Unsurprisingly, Ramsey’s company appears to have a business relationship with a mortgage underwriter specializing in selling mortgages to people who do not have credit.

To purchase a home or finance a car, you want to build your credit score ahead of time. Doing so will enable you to work with more lenders, give you access to better rates and may reduce your costs if you require PMI. Using credit cards responsibly is one of the easiest ways to build your credit score.

Related: Credit card strategies for mortgage and home loan applicants

Credit cards are worthless because no millionaires built their wealth from them

A person is shown putting a hundred dollar bill into a mason jar with other hundred dollar bills inside.

Ramsey is fond of asserting that millionaires don’t build their wealth by using credit cards, pointing out that 2% cash back on a $1,000 purchase is only $20 and then saying that credit cards don’t provide any measurable value. While I’m happy to take at face value that no one has become a millionaire exclusively from earning credit card points and miles, many people have certainly gotten a massive amount of value from credit card rewards, well over the cost spent to earn the rewards.

Ramsey conveniently ignores the value of welcome bonuses. If you want to amass a lot of points, miles or cash back, one of the quickest and easiest ways is by taking advantage of generous welcome bonuses offered when you open a new credit card. Many welcome bonuses offer north of $1,000 of value, and if you can capture that through spending you would be doing anyway, you can get a massive amount of value out of cards.

He also implies that rewards always expire. While it is true that every rewards program has terms and conditions, in practice, most rewards programs give you plenty of time to redeem your rewards. Just as a few examples, let’s look at the largest three transferable points programs. American Express Membership Rewards points don’t expire as long as you hold at least one Membership Rewards-earning credit card. Chase Ultimate Rewards points don’t expire as long as you keep your card open. Citi ThankYou points also generally don’t expire as long as you keep your card open. 

Sure, you shouldn’t plan on getting rich, but the rewards from credit cards can be substantial if you shop around, accumulate a few welcome bonuses and pay off your cards every month. Even if you only put groceries, gas and general household purchases on a credit card that earns 2% cash back and pay it off every month, you are still coming out 2% ahead. 

Related: 12 credit cards that can get you $1,000 or more in first-year value

Annual fees eat up the value of rewards

This is false because there are many great credit cards that earn rewards and charge no annual fee. Also, many credit cards with annual fees provide value in excess of the annual fee through increased rewards and perks.

One example: If you spend $6,000 on purchases at U.S. supermarkets on the Blue Cash Preferred® Card from American Express you will earn $360 in rewards, which more than pays for the card’s $0 intro annual fee for the first year then, $95 annual fee (see rates and fees). Another example is the increased rewards on travel purchases on the Citi Premier® Card that can more than offset the card’s $95 annual fee. The list goes on.

In addition, many cards offer benefits to frequent travelers that can justify paying an annual fee, such as airport lounge access or rental car insurance. Extended warranty and purchase protection can also provide a huge boost. Personally, access to Delta Sky Club lounges helps me justify paying the annual fee on The Platinum Card® from American Express since it replaces cash that I would otherwise spend on meals while traveling.

If you carry a card with an annual fee, always review the value you are getting against what you are paying. If you are not getting more value than the card’s annual fee, consider downgrading or canceling the card.

Related: Are premium credit cards worth the annual fee?

Credit cards and debit cards have the same protections


Dave is a fan of saying that when you use a debit card, “you have the exact same protections as a credit card.” Unsurprisingly, he doesn’t cite any sources because this is untrue. In some cases, you can have unlimited liability for unauthorized charges made to your debit card, while federal law caps your liability for unauthorized charges on a credit card at $50.

Under the Electronic Fund Transfer Act, you can have up to unlimited liability for fraudulent transactions charged to your debit card. You have zero liability if you report a lost or stolen debit card to your bank before a fraudulent transaction occurs. If you report an unauthorized transfer within two days, your liability for the unauthorized transfer is capped at $50; after two days, your liability increases to $500. The EFTA provides no protection if you report a lost card more than 60 days after a fraudulent transaction.

In contrast, credit cards offer more protection to consumers under the Fair Credit Billing Act, which limits liability for unauthorized charges made on a credit card to $50.

Further, when you dispute a fraudulent credit card charge, you do not need to pay, and your bank can not try to collect any amounts in dispute while they are being investigated. You do not have the same protections with a debit card, and your bank may freeze funds in your account while investigating your payment dispute.

Related: How to prevent credit card fraud

Promotional interest rates are a ‘bait and switch’

Before discussing interest rates, I want to make a quick point about credit card rewards and paying interest. If you are paying any interest on credit cards, you are almost certainly losing the credit card rewards game. You should first focus on paying off your credit card debt.

That said, if you have credit card debt, you can use promotional interest rates as a tool to help you pay it off. I have helped friends use this strategy to eliminate thousands of dollars of credit card debt.

If you have $10,000 in credit card debt at a 29.9% annual percentage rate and transfer that balance to another card using a 0% balance transfer promotion, you will save almost $3,000 in interest per year while the promotion is in effect. That’s an additional $3,000 you are not paying to a bank and can use to help you pay down your debts. Some promotional interest rate periods can last 18 months, giving you even more time to work on paying down your credit card debt. 

Promotional interest rates are time-limited, so be sure to understand when the promotional rate expires, but they can be a useful tool in helping you pay off your credit card debt.

Related: Everything you need to know about balance transfer credit cards

Bottom line

At the end of the day, credit cards are a financial product that you can use as a tool to protect yourself from fraud, access benefits and make purchases more convenient. For advice on using credit cards responsibly, check out TPG’s 10 Credit Card Commandments. Alternatively, here are my four biggest tips:

  • Pay off every card in full and on time every month. A great way to do this is to set up autopay immediately when you receive your card.
  • Make a budget and stick to it. Don’t use access to credit as a license to overspend your budget.
  • Have a plan to redeem your rewards. Be sure to go on that trip you had in mind or redeem your cash-back earnings. Don’t forget about your rewards.
  • Evaluate cards with annual fees every year. Ensure you are getting value in excess of the annual fee for every card you hold. If you aren’t, look at options for downgrading or canceling your card.

While I will happily give Ramsey credit for providing tools that have helped some people get out of debt and put themselves on a better financial footing, credit cards certainly aren’t the monsters he makes them out to be. If you can pay your balances in full and use credit cards responsibly, they can be a great tool to help you manage your finances and earn rewards.

For rates and fees of the Amex Blue Cash Preferred, click here.