Dave Ramsey Says FICO Credit Scores Are Irrelevant. Are They?
Question: I love your show and also Clark Howard. I also love Dave Ramsey. I have read his book “Total Money Makeover” and took his 13-week course two years ago. He is in a totally different ballpark than you and Clark when it comes to credit. He teaches getting out of debt and staying out, which I happen to like. I heard you mention him on your show Sunday and the fact that you do need a FICO score if applying for a mortgage. Below is an answer from his office to my e-mail regarding this very topic. I would like your take on this. I respect your opinion, but I also agree with Dave on this. Am I missing something? Thanks for all you do.
“For years I have been attacking the FICO score as a bogus measure of winning. All it measures is your interaction with debt. It is composed of 35% Payment History, 30% Amount of Debt 15% Length of Credit History, 10% Type of Debt, 10% Applying for new credit. So it really is the “I love debt” score because there is no way to have a great FICO score without getting into debt and staying in debt. If you make 1 million dollars per year and have 10 million dollars in the bank you can have a low FICO score simply because you don’t borrow.” So we tell people they can get a mortgage with a manual underwritten loan if they never borrow by paying their landlord early or on time and being on the job for two years. Keep in mind that the only loan Dave endorses is a 15 year mortgage.
You need to know that Churchill Mortgage will do a manually underwritten loan if they have to, to get our listeners a mortgage loan. However, you also need to be aware that they will first try an automated (FICO score) loan which I don’t mind at all. So if someone says Churchill gave them a FICO approved loan that is fine.
Do not use credit cards to build good credit. This shows to a mortgage company you have not learned your lesson. In fact, having several open credit card accounts, even with zero balances, can count against you. If you have bad credit or you are just starting out, do not borrow to create a good credit report. A clean period of time, with all of your bad debt made good, a decent down payment, and a steady job record is enough to get you approved for most mortgages. All information, good or bad, is removed seven years from date of last activity, except a Chapter 7 bankruptcy, which stays on a report for ten years.”
How do you respond to this?
Credit scores are not only relevant, they are extremely important to your financial health.
Answer: I have nothing but total respect for Dave Ramsey and what he is trying to do – which is get people out of debt. I don’t believe in carrying any debt except a mortgage, and other than a very small mortgage, have never carried any sort of personal debt. I pay cash for my cars, clothes, and everything else.
But I respectfully disagree with Mr. Ramsey’s contention that FICO scores only measure debt. They don’t. They measure how risky you are as a borrower. And, while he may not agree with the credit economy, a future employer will pull a copy of your credit history before deciding whether to offer you a job or not. An insurer will pull a copy before deciding how much to charge you for a premium – or whether to insure you at all.
Credit scores are a way of life, and you need to play along with the game if you’re going to be employed and going to be insured.
So, I believe that you have to work to build up your credit score. I own a fistful of credit cards. I use them all the time. But I pay them off at the end of the month. My credit cards give me 2 percent cash back, 1 percent cash, back and millions of miles that I have used to travel the world – for free.
Credit cards aren’t evil. But for someone who doesn’t have a strong sense of financial right and wrong, they can get you into trouble.
I hope this helps.