Has anybody had success paying of debt with Dave Ramsey's theory?

[tafan]

My husband has been reading through this thread with me.

He says that even though a bank might replace debit card money that was “lost” due to theft or fraud, they are under no legal obligation to replace that money. They would do so out of the goodness of their heart, to create customer loyalty, etc. But legally–they could treat this “loss” the same way they would treat a loss of cash. “So you were at the fair and you reached into your pocket and all your money was gone? And now you want us to replace it? Sorry, sir. We can’t do that.”

However, credit card companies are under legal constraints to replace money lost through fraudulent charges. And credit card companies have good methods in place to track fraud. My husband was in New York a few weeks ago, and made a few small charges on one of his cards. The company CALLED him and asked him if those charges were made by him. (He hasn’t been in New York on a regular basis, and so it was something out-of-the-ordinary that the credit card company picked up on.). I think that’s great protection.

Generally speaking, putting hotel reservations or travel reservations on a debit card is a really bad idea. Nothing stops the company from adding an extra amount to your debit transaction to cover expenses that you may occur while you are there. And then that money in your account isn’t available to you. When you leave the hotel and head for the McDonald’s and try to use your debit card to buy a Big Mac, your transaction will be denied due to insufficient funds. And there’s not one thing you can do about it!

But this can’t happen with a credit card, because they aren’t using your money, they’re using money that you promise you will pay them back.

Hope this makes sense to you. My husband travels a lot for skating and for his company (the big computer company).

I do not think it is just out of the goodness of their heart. It is true that all of the legal consumer protections are not the same, but contract and advertising laws still apply. If you have an agreement with them concerning fraudulent policies or if they advertise certain fraud policies, they have to legal follow through.

I have traveled a lot using only debit cards and I have never had any of these problems people keep bring up. I think Paul was correct, it is more myth than fact. Hotels show you the exact receipt they put on your card.

And if it does happen to occur, it could just as easily cause a problem on a credit card. With a debit card, the fraudulent charge could drain your account and you can’t buy anything else. With a credit card fraudulent charge could put you at your credit limit and you can’t buy anything else.

I would suggest the debit card situation is easier to fix in an emergency than a credit card. If my smart phone works I can transfer money from a different account with a debit card. I suppose one could immediately submit a payment on line with a credit card to get one below the credit limit, but I bet that has a day delay on it if the financial institution is separate.

 

[PaulGH]

My husband has been reading through this thread with me.

He says that even though a bank might replace debit card money that was “lost” due to theft or fraud, they are under no legal obligation to replace that money. They would do so out of the goodness of their heart, to create customer loyalty, etc. But legally–they could treat this “loss” the same way they would treat a loss of cash. “So you were at the fair and you reached into your pocket and all your money was gone? And now you want us to replace it? Sorry, sir. We can’t do that.”

Are you sure that that is true? I have always heard that any transactions on a Visa debit card that are made using the Visa system have the same fraud protection as a Visa credit card. But if you run your card as a debit card rather than as credit, then the fraud protection may not be as good, and may be reliant on the good will of your bank as you said. That’s one reason why I always run mine as credit, not debit. (From my perspective, both transactions are the same, because they both come directly out of my bank account. But from the financial institution’s perspective, the credit transaction uses the Visa system, while the debit transaction doesn’t.) And if someone stole my card, he couldn’t run it as debit unless he also knew my PIN, which is unlikely.

 

[PaulGH]

From the Visa web site:

What happens if someone steals my Visa Debit card and uses it fraudulently?

If your Visa Debit card is lost or stolen and fraudulent activity occurs, you are protected by Visa’s Zero Liability policy.* That means 100 percent protection for you. Whether purchases occur online or off, you pay nothing for fraudulent activity.

If you notice fraudulent activity on your Visa Debit card, promptly contact your financial institution to report it. It is important to continually monitor your monthly statement to identify any unauthorized transactions.

Source: usa.visa.com/personal/personal-cards/debit-cards/faq.jsp#anchor_20

More information:

usa.visa.com/personal/security/zero-liability.jsp

Maybe Visa isn’t legally obligated to offer this protection for debit cards, as opposed to credit cards, but it appears that in fact they do offer it.

 

[phillylawyer]

From the Visa web site:

Source: usa.visa.com/personal/personal-cards/debit-cards/faq.jsp#anchor_20

More information:

usa.visa.com/personal/security/zero-liability.jsp

Maybe Visa isn’t legally obligated to offer this protection for debit cards, as opposed to credit cards, but it appears that in fact they do offer it.

That is visa’s policy and it varies by company. Also, if you notice the footnotes on their website, this limited liability has a number of limitations.

The point is not that debit cards have no fraud protection (they do), just that they have less protection than credit cards do. I have had a couple of clients who had $1,000+ stolen from debit cards that they were not able to get back. I have never seen that happen with credit cards.

usa.visa.com/personal/security/zero-liability.jsp

1 Covers U.S.-issued cards only. Does not apply to ATM transactions, certain commercial card transactions, PIN or other transactions not processed by Visa. You must notify your financial institution immediately of any unauthorized use. For specific restrictions, limitations and other details, please consult your issuer.

 

[tafan]

Are you sure that that is true? I have always heard that any transactions on a Visa debit card that are made using the Visa system have the same fraud protection as a Visa credit card. But if you run your card as a debit card rather than as credit, then the fraud protection may not be as good, and may be reliant on the good will of your bank as you said. That’s one reason why I always run mine as credit, not debit. (From my perspective, both transactions are the same, because they both come directly out of my bank account. But from the financial institution’s perspective, the credit transaction uses the Visa system, while the debit transaction doesn’t.) And if someone stole my card, he couldn’t run it as debit unless he also knew my PIN, which is unlikely.

I am pretty sure the same fraud protection is applied regardless of how you run your card.

I would make the following guess about the fraud detection systems: Try to use the same method as much as possible (either running it through as credit or debit, I always do debit).
In a previous life, a long, long, time ago: I wrote SW for fraud protection systems. Its all about establishing usage patterns. So when the pattern changes, the red flag is raised. I try to run my on debit as much as possible. This is because if it starts getting used in a credit mode, it might help alert the system something is amiss. This is only a guess, but I think it might be a good guess.

 

[PaulGH]

That is visa’s policy and it varies by company.

I don’t think I have ever had a debit card with any logo other than Visa, so that is the one that matters for me personally. And I don’t think there is any other major debit card company in the U.S. other than Visa and Mastercard.

1 Covers U.S.-issued cards only. Does not apply to ATM transactions, certain commercial card transactions, PIN or other transactions not processed by Visa. You must notify your financial institution immediately of any unauthorized use. For specific restrictions, limitations and other details, please consult your issuer.

Unless I am mistaken, that disclaimer applies to both debit cards and credit cards with the Visa logo, since that page mentions “Use your Visa credit or debit card…”

Now, a credit card might not be set up to be used as an ATM card with a PIN, in which case those particular restrictions would not apply to the credit card. But if I recall correctly, a long time ago when I had a credit card, it did have a PIN, and I could withdraw cash at ATMs. So maybe those restrictions about ATM and PIN transactions would apply to credit cards too – I’m not sure.

 

[DarkLight]

I’ve read concerns in several posts here that financial planning isn’t for the poor or isn’t for those who aren’t financially flush. I have to disagree with that. This is all about telling your money where to go, no matter how little or much money you have, so your money (or lack of it) doesn’t control you.

There is a couple who have even been leading DR classes in prison in Seattle. The inmates earn $55 a month. They have to buy their own hygiene products, some groceries and extracurricular activities out of that money. Needless to say, they’re not flush. And as convicted criminals, you can imagine many had disadvantages in this life that kept them from learning proper money managing techniques in the past. The class costs them $10, nearly 20% of their monthly budget, yet at the end of the class, many are able to save up another $10 to donate the tuition for a fellow prisoner.

One man even learned to live on $10 a month and was able to send his wife the other $45. She was able, over time, to pay off two credit cards. Another man (whose father was in the same prison and whose mother was the sole support of the family) had been asking his mother for money every week, but stopped asking because he learned to live within his means.

The DR plan isn’t just for the rich. Everybody has some form of money or goods that they need to learn how to allocate.

I suppose a better way to say it: It’s not magic, and I don’t think it’s that helpful if you know how to manage money already. And he can be sort of annoying, especially if you’re encountering some of his more devoted followers, when he says things like “Anyone can become debt free. True debt reduction is plain common sense and hard work.” No, for some of us there was genuinely no good way to not end up in debt and there really isn’t anything we can do about it right now. Ok, that can be really annoying, especially when you’ve had people throwing his “responsibility” stuff in your face.

Some of his stuff seems either very unrealistic (25% of income on housing - yeah right) or aimed at people who primarily have self control issues (no credit cards). He doesn’t seem to have much up front for when you’ve added everything together and it’s still not covering the basics, or not covering anything past the basics. I could still see it being good for people who never learned financial planning, but for lower incomes it seems to do little that a simple spreadsheet wouldn’t.

 

[SuperLuigi]

No debt. The most significant part of his plan is called the debt snowball. It is aimed at getting you out of debt. To get out of debt, first establish a rainy day cash fund. Then sort your debts based on smallest to highest balance. Take every spare dollar you have and apply it to the lowest, while making minimum payments on the others to keep them current. Once the lowest is paid off, move up to the next. It called the debt snowball, and it will get the typical person out of debt faster than any other method, IMO.
As you get rid of the small debts, you have more and more to apply to the big debts. I have heard people say ton his radio program that they end up paying off a 2$0K debt at the end as quickly as they paid off a $2 debt at the beginning. Maybe an exaggeration, but I bet it is close to being true.

:thankyou:

Yeah, this is more or less the generic formula that he tosses around. “Live on rice and beans to the point of where others are worried about you”.

Right now everything my wife makes (which is more than me) goes towards travel expenses (about 1/4-1/3) and the rest towards debt.

The main thing I see is that a lot of people make enough money to pay off debt but just don’t budget for a more immediate pay-off. In other words, they live as if they had no debt.

 

[phillylawyer]

I suppose a better way to say it: It’s not magic, and I don’t think it’s that helpful if you know how to manage money already. And he can be sort of annoying, especially if you’re encountering some of his more devoted followers, when he says things like “Anyone can become debt free. True debt reduction is plain common sense and hard work.” No, for some of us there was genuinely no good way to not end up in debt and there really isn’t anything we can do about it right now. Ok, that can be really annoying, especially when you’ve had people throwing his “responsibility” stuff in your face.

Some of his stuff seems either very unrealistic (25% of income on housing - yeah right) or aimed at people who primarily have self control issues (no credit cards). He doesn’t seem to have much up front for when you’ve added everything together and it’s still not covering the basics, or not covering anything past the basics. I could still see it being good for people who never learned financial planning, but for lower incomes it seems to do little that a simple spreadsheet wouldn’t.

This is pretty accurate too. Dave Ramsey basically says don’t spend more money than you make. Dave Ramsey in a nutshell:

screen.yahoo.com/dont-buy-stuff-000000884.html

“Don’t buy stuff you cannot afford.”

I know that there is a little more to him than that. But, to be honest, his value add is not a lot more than mint.com plus the above video.

Also, his debt snowball, while maybe making psychological sense in certain circumstances, doesn’t make mathematical sense (which he admits). If you have a $5,000 loan at a 4% interest rate and a $10,000 loan at a 25% interest rate, it is absolutely insane to pay the minimum on the $10,000 loan and pay down the $5,000 loan with his “debt snowball.” Just dumb.

And, as Darklight points out, for some people, the problem really is not just “Don’t buy stuff you can’t afford.” The problem is, “I don’t make enough money to buy the things I really need.” That’s a different problem.

 

[PaulGH]

And, as Darklight points out, for some people, the problem really is not just “Don’t buy stuff you can’t afford.” The problem is, “I don’t make enough money to buy the things I really need.” That’s a different problem.

When people like that call his show, Dave Ramsey advises them to find some way to increase their income (and tries to give them some concrete ideas that might help), rather than advising them to live on an amount of money that just isn’t enough for a person or a family to live on. In other words, he recognizes that there is a limit to how far a person or a family can cut expenses.

 

[Xantippe]

Some of his stuff seems either very unrealistic (25% of income on housing - yeah right) or aimed at people who primarily have self control issues (no credit cards).

Think of it as a long-term goal.

It’s helpful to know when you’re in the danger zone. 25% of income or less spent on housing is pretty safe. As that creeps toward 50% or above, the situation is more and more perilous. If you don’t know that rule, you might accidentally find yourself in a dangerous situation. When we first moved to DC, we went immediately into the danger zone. I budgeted, budged, budgeted (not very effectively), but still no good. It was only years later when I realized what the problem was–once one enters that housing danger zone, one can more or less expect bad things to happen and keep happening, regardless of what other smart things one is doing in other parts of one’s life.

If you manage to reduce your expenses or increase your income to the point where housing is only 25% or less of income, you’ll find that life is suddenly brighter and happier. (We have $500 2-bedroom grad apartments here locally, by the way–a little ratty, but very affordable and conveniently located.)

Elizabeth Warren has a book entitled “All Your Worth” that you may find more helpful. She teaches a 50/30/20 plan–that’s 50% of income should go to mandatory expenses (“needs”), 30% should be wants and 20% should be savings/debt repayment. I can’t do that budget plan because our family life has lots of moving parts, but I think it could work very well for a single or low-income person with a less complex life. One of Warren’s more interesting insights is that it’s not the “fun” purchases that kill you, because you could stop buying boots or going to Ren Faires or drinking apple martinis any time. What kills you is heavy fixed expenses–high rent or mortgage, high car payment, etc, because in case of emergency, you can’t just stop paying that stuff and continue to live in your home and drive your car. For a simple budget, it’s a nice, clean approach.

 

[PaulGH]

Think of it as a long-term goal.

It’s helpful to know when you’re in the danger zone. 25% of income or less spent on housing is pretty safe. As that creeps toward 50% or above, the situation is more and more perilous. If you don’t know that rule, you might accidentally find yourself in a dangerous situation. When we first moved to DC, we went immediately into the danger zone. I budgeted, budged, budgeted (not very effectively), but still no good. It was only years later when I realized what the problem was–once one enters that housing danger zone, one can more or less expect bad things to happen and keep happening, regardless of what other smart things one is doing in other parts of one’s life.

If you manage to reduce your expenses or increase your income to the point where housing is only 25% or less of income, you’ll find that life is suddenly brighter and happier. (We have $500 2-bedroom grad apartments here locally, by the way–a little ratty, but very affordable and conveniently located.)

Elizabeth Warren has a book entitled “All Your Worth” that you may find more helpful. She teaches a 50/30/20 plan–that’s 50% of income should go to mandatory expenses (“needs”), 30% should be wants and 20% should be savings/debt repayment. I can’t do that budget plan because our family life has lots of moving parts, but I think it could work very well for a single or low-income person with a less complex life. One of Warren’s more interesting insights is that it’s not the “fun” purchases that kill you, because you could stop buying boots or going to Ren Faires or drinking apple martinis any time. What kills you is heavy fixed expenses–high rent or mortgage, high car payment, etc, because in case of emergency, you can’t just stop paying that stuff and continue to live in your home and drive your car. For a simple budget, it’s a nice, clean approach.

Our mortgage payment is less than one-sixth of our income, and it still seems like way too much! But we had gotten used to having a paid-off house for quite a few years. We also pay Catholic school tuition, so that is almost like a second mortgage.

It is hard for me to imagine how anyone could have good financial health when paying much more than 25% of their income toward housing. I can see how it could be difficult to keep mortgage or rent to 25% or less if you have a low income and live in a city where housing costs are very high. But in most places where I have lived, I think it would be doable for most people (and I have lived in several states, including everything from very large cities to sparsely populated rural areas).

 

[phillylawyer]

I just applied for (and was approved for) credit card number 13 (to receive the $300 free cash offer). 5 minutes to apply for a credit card with $300 back is not bad.

I know Dave Ramsey (and some on this thread) would be appalled at such actions. It just made me think of Dave Ramsey (and this thread) as I was doing it.

 

[PaulGH]

I just applied for (and was approved for) credit card number 13 (to receive the $300 free cash offer). 5 minutes to apply for a credit card with $300 back is not bad.

I know Dave Ramsey (and some on this thread) would be appalled at such actions. It just made me think of Dave Ramsey (and this thread) as I was doing it.

When I was in college, you would get a free 2-liter soda or a free t-shirt for applying for a credit card. I guess I should have held out for more!

 

[phillylawyer]

When I was in college, you would get a free 2-liter soda or a free t-shirt for applying for a credit card. I guess I should have held out for more!

Ha!

Yeah, 2-liter soda and free t-shirt isn’t quite enough for the small time spent (15-30 minutes total, including setting up an online account and arranging for auto pay in full of balance) and small credit score hit you take for it.

My rule of thumb is $150 or more to be worth it. And, no more than 2 new credit cards per 6 months or 3 per year. And, if you are planning on applying for a big loan (mortgage, car, etc.) in the next six months, just wait until that is done.

As people have pointed out, no one gets rich with credit card rewards. But, I put everything on credit card (business trip flights, etc.) and earn between 2k and 3k in rewards each year, for a time investment of about 3-4 hours per year. It’s not going to make you rich, but that extra money would definitely help most families. And, if you have enough money that you don’t need 2k to 3k, I’m sure your local parish could use the extra donation!

This of course is with the caveat that, people who have a history of not paying credit cards on time or running up credit card debt should not do it. If there is a non-minimal risk of getting yourself into trouble with credit cards, the cash rewards benefits are not worth the risk.

 

[phillylawyer]

Ha!

Yeah, 2-liter soda and free t-shirt isn’t quite enough for the small time spent (15-30 minutes total, including setting up an online account and arranging for auto pay in full of balance) and small credit score hit you take for it.

My rule of thumb is $150 or more to be worth it. And, no more than 2 new credit cards per 6 months or 3 per year. And, if you are planning on applying for a big loan (mortgage, car, etc.) in the next six months, just wait until that is done.

As people have pointed out, no one gets rich with credit card rewards. But, I put everything on credit card (business trip flights, etc.) and earn between 2k and 3k in rewards each year, for a time investment of about 3-4 hours per year. It’s not going to make you rich, but that extra money would definitely help most families. And, if you have enough money that you don’t need 2k to 3k, I’m sure your local parish could use the extra donation!

This of course is with the caveat that, people who have a history of not paying credit cards on time or running up credit card debt should not do it. If there is a non-minimal risk of getting yourself into trouble with credit cards, the cash rewards benefits are not worth the risk.

And, people who think credit card companies are evil and should be shut down should like this too. The credit card company is paying me $300 in rewards to charge $500 over six months (on stuff I would buy anyway). I won’t pay a dime in interest. Now, they will get some fees from the merchants when they charge the card, but not enough with $500 in spending to offset the $300 reward payout (plus the other administrative costs they incur).

So, they will definitely lose money on me, and, therefore, be slightly less likely to continue this practice in the future. See. I am doing my part to fight the evil credit card companies!

 

[phillylawyer]

Also, a couple of other pieces of financial advice that Dave Ramsey gives out that is either naive or flat out wrong:

From his book total money makeover, in talking about paying off a mortgage:

“This situation is one more opportunity to discover if your CPA can add. If you do not have a $10,000 tax deduction and you are in a 30 percent bracket, you will have to pay $3,000 in taxes on that $10,000. According to the myth, we should send $10,000 in interest to the bank so we don’t have to send $3,000 in taxes to the IRS. Personally, I think I will live debt-free and not make a $10,000 trade for $3,000. However, any of you who want $3,000 of your taxes paid, just e-mail me and I will personally pay $3,000 of your taxes as soon as your check for $10,000 clears into my bank account. I can add.” [Page 187]

Really? This is so mathematically naive (especially for a guy claiming you can get a 12% return by investing in stocks) it’s hard to take it seriously.

 

[phillylawyer]

Another statement of Dave’s that is flat out wrong in his book:

"Let’s say you’re 30 years old bringing home $40,000 a year. If you put 15% of that into retirement, that’s $6,000 a year – $500 a month. If you put $500 a month into good growth stock mutual funds that average 12% from 30-70 years old, then you would have almost $6 million. Over 40 years, you’ve put in $240,000 and your return is $6 million.

If you do that in a 401K, that money is taxable. The money went in before taxes, but the money is taxable as it comes out. Your $240,000 that went in pre-tax is almost irrelevant in light of the $6 million that is going to be taxed.

But if you put money in a Roth IRA, it grows tax-free. That means if you put the same amount into the Roth, you’ve got $6 million, none of which goes to Uncle Sam. The Roth IRA is always superior to the 401K because of this."

That last sentence is just flat out wrong. If your tax rate is higher when you take your money out than when you put it in, he is right. If the opposite, then he is dead wrong. Again, the one size fits all simplistic financial advice is sometimes painful to read.

 

[Burt_Macklin]

I just applied for (and was approved for) credit card number 13 (to receive the $300 free cash offer). 5 minutes to apply for a credit card with $300 back is not bad.

I know Dave Ramsey (and some on this thread) would be appalled at such actions. It just made me think of Dave Ramsey (and this thread) as I was doing it.

I can’t help myself when it comes to airline miles. I apply for the card, spend the minimum, and then cancel the card after they give me my miles. The last offer was 50k miles, which I will turn into a flight to Germany that would have cost me 1200 otherwise. Collecting miles is the only way I can show my children the world. And it works for me because there isn’t anything that you can say to me that would make me feel bad. I just fix a strong drink and then get ready to have someone try to lay a guilt trip on me.

 

[phillylawyer]

I can’t help myself when it comes to airline miles. I apply for the card, spend the minimum, and then cancel the card after they give me my miles. The last offer was 50k miles, which I will turn into a flight to Germany that would have cost me 1200 otherwise. Collecting miles is the only way I can show my children the world. And it works for me because there isn’t anything that you can say to me that would make me feel bad. I just fix a strong drink and then get ready to have someone try to lay a guilt trip on me.

The only downside to that is that if you open and close a lot of credit card accounts, it may hurt your credit score. If you have the self-control, it is probably better to get the card and the miles, then just keep the credit card in your sock drawer. Every two or three months charge 20 bucks on the card (on a purchase you would have made anyway), and make sure to just have the “auto pay balance in full option” selected on your online account to make sure you don’t forget to pay the bill.

If you do that, you get the benefit of the airline miles, never risk paying a dime of interest, and you actually get a boost to your credit score (instead of a ding) by increasing the average age of your credit accounts, lowering your credit utilization ratio (by having unused credit limit), and not having the ding of a number of recently closed credit accounts.

Again, this advice only applies if you won’t be tempted to take the credit card out of your sock drawer and run up a bunch of charges on it. Also, this advice assumes that there is no annual fee for the card. If there is, that extra cost might mean closing the credit card and taking the ding is better than having to pay that dang annual fee.