For many years, Mr. Dave Ramsey, debt solutions guru, advocates a position that no consumer needs a credit score. He claims that you can purchase a house or anything else without a credit score. He basically tells his followers that a credit score is a bad thing. Since he doesn’t understand FICO credit scores, he pushes a position that is financially illiterate.
Mr. Ramsey has some great points of emphasis to help consumers get out of debt. They should be applauded. It is always a good position for consumers to get out of debt. That should be the ultimate goal for every consumer. Find ways to pay off debt sooner rather than later. Following such sound advice, consumers can put more money towards their retirement at a faster pace and attain greater returns, and more wealth.
Mr. Ramsey’s Position
However a FICO® credit score still matter even to those who have all the money in the world. I often am questioned by thousands who have followed Mr. Ramsey’s financial tools. They always ask me, “Is not having a credit score a good thing?” My answer is that anyone who follows this poor advice will be limited in their financial decisions and end up paying much more (even if they can qualify for any loan) for a mortgage, an auto loan, and even their insurance premiums.
Mr. Ramsey states to his followers, “Want to know how to improve your credit score? It’s simple: Pay off your debt, don’t add any new debt, and let your credit score dwindle until it’s completely extinct.”
He continues, “Not the answer you were expecting? If you’re like most people, you’re probably shaking your head in disbelief wondering, How can I improve my credit score by letting it go extinct? And don’t I need a credit score to buy a house? Trust us: Not having a credit score is a good thing—a really good thing! And you absolutely don’t need a credit score to buy a house.”
Mr. Ramsey adds, ”We’ve said it before, and we’ll say it again: The best way to really increase your credit score is by ditching your credit altogether. Peace out, credit score—you’ve been dumped!
Oh, and don’t worry about a credit score when it comes time to buy a new home. You don’t need a stinking credit score for that either (despite what people might tell you). There’s a process called manual underwritingthat looks at the full picture of your financial stability, rather than just your credit score. See? You can breathe easy.”
Breathe easy? I have been a mortgage lender for over 30 years. Manual underwriting was done over 20 years ago. I have not seen a mortgage be approved without a credit score for all these years. It is a non-starter. It could possibly happen somewhere. I don’t know anyone who does it. Even if some underwriter or lender approves a loan without a credit score, that lender has put themselves in a precarious financial position of trying to get a loan insured (sold off) through major investors without a credit score. That usually doesn’t happen. All these investors require credit scores. The lender would then just have to keep the loan on their own books potentially costing them $10,000’s of dollars – and there are not many lenders who want to do that. If they do, the borrower ends up paying a higher interest rate and higher fees, costing themselves a lot more money.
It's a Marketing Theme, Not Reality
Why does Mr. Ramsey advocate such a position? To maintain a certain position with his philosophy. It is all about selling books and his own programs. He makes more money selling such points of view and he doesn’t want to run counter to this. Imagine if he came out and said to use some debt to do something. It would run counter to everything he advocates for. He would lose money.
He may be rich and not need a credit score to take out a loan. For the millions of other common consumers, they do not have the same financial position. Mr. Ramsey is putting such consumers in a worse financial position. His position doesn’t make financial sense. It is our financial reality today. He is advocating a position from many years ago that was possible then, not now. Since Mr. Ramsey doesn’t know how credit scores work, he just says you don’t need one. But Mr. Ramsey won’t admit that he doesn't understand FICO scores, or he would lose credibility. But he doesn’t realize it, he has already lost credibility advocating such poor financial advice.
What do you do?
Getting out of debt is a good thing. I have done my financial instructional, The Drive to 850, with thousands of those who have taken financial instruction from Mr. Ramsey. I am always asked the question, “Is a credit score a bad thing like Mr. Ramsey advocates?” I reply his position is unrealistic. Simply having a credit card, using to charge monthly expenses, manage it properly and pay that debt off before the due date the following month to avoid interest is sufficient to build and maintain a really good credit score. This is sound advice that will save you a lot of money.
When you go to purchase a house, auto or other type of loan, you don't have to be on pins and needles begging to be approved for a loan. You won't have to beg or face the prospects of being denied for a loan. In most cases, you can also qualify for lower auto and homeowners insurance premiums. This way, you can breathe easier.