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Dave Ramsey - No FICO?
Old 12-13-2010, 03:37 PM   #1
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Dave Ramsey - No FICO?

I recently finished reading Dave Ramsey's Total Money Makeover. My wife and I have a good amount of debt between our student loans and auto loans. I like a lot of his ideas about snowballing your debt and staying away from debt altogether.

My only concern with this is that it will basically kill your FICO score. We are looking to purchase a home down the line with a large downpayment after we kill this debt. He claims you don't need to use your FICO score but I don't see how this is possible and also I believe having a poor FICO could hurt us in other ways in the future.

Can anyone provide some insight on this? How important is the FICO? What are some good ways to maintain a good FICO score without using a credit card? Is this another area Ramsey is incorrect on?

Thanks in advance!
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Old 12-13-2010, 03:41 PM   #2
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I doubt you will drop your FICO score much between now and the time you purchase the house. We are Ramsey fans with only a single credit card to our name and have very high FICO scores, even after paying off the mortgage and eliminating other debts.

It takes a mighty long time to drop completely off the FICO radar and as long as you have one current card and clean records on the ones you've closed, you'll be fine.
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Old 12-13-2010, 03:44 PM   #3
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A couple of year ago, we paid off all of our debts, after selling our home. We're not retired yet, but will be in 2 yrs. We currently rent, and likely will continue to do so until we retire, at which point, we will pay cash for our retirement home.

This might not work for everybody, but it's the way we're gonna do it. I don't intend to have a mortgage, car payment, or any other kind of debt from here on out....

The small exception is that I owe $2700 to Toyota Financial Svcs. for a 2010 Camry that I bought in 2009. I could have paid cash, but Toyota was offering 0% interest. I asked what the smallest amount that could be financed & get the 0%, and they said it was $5000. So..I financed $5032 at 0%. Figured I'd use their money instead of mine. I'm dragging it out at $139 per month lol.

Anyhow...back to the topic....I plan to stay completely out of debt, and don't give a rat's behind what my FICO score is anymore! Of course, YMMV. I'd say if you're planning to finance a bigger ticket item like a home, you probably would need to keep your FICO up at a respectable number.
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Old 12-13-2010, 03:49 PM   #4
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A couple of year ago, we paid off all of our debts, after selling our home. We're not retired yet, but will be in 2 yrs. We currently rent, and likely will continue to do so until we retire, at which point, we will pay cash for our retirement home.

This might not work for everybody, but it's the way we're gonna do it. I don't intend to have a mortgage, car payment, or any other kind of debt from here on out....

The small exception is that I owe $2700 to Toyota Financial Svcs. for a 2010 Camry that I bought in 2009. I could have paid cash, but Toyota was offering 0% interest. I asked what the smallest amount that could be financed & get the 0%, and they said it was $5000. So..I financed $5032 at 0%. Figured I'd use their money instead of mine. I'm dragging it out at $139 per month lol.

Anyhow...back to the topic....I plan to stay completely out of debt, and don't give a rat's behind what my FICO score is anymore! Of course, YMMV. I'd say if you're planning to finance a bigger ticket item like a home, you probably would need to keep your FICO up at a respectable number.

LOL.... my Mom bought a Hyundai earlier this year... she got $1,000 back if she 'financed' the deal.. even the salesmen were saying you can pay it off in one month... I asked what the interest rate would be and the guy said 'who cares, you are going to pay it off next month anyhow'... I had to agree with him... but, it was 4% and my mom messed up and it took her two months to pay it off... got to keep that $1,000 though...
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Old 12-13-2010, 03:49 PM   #5
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I believe you need to keep your score above 750 to get the best mortgage rates.
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Old 12-13-2010, 03:50 PM   #6
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We paid all all of our debt, except, house in 1983. We purchased three houses since that time, and our FICO is very high, so living debt free has not seemed to have had an effect.
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Old 12-13-2010, 03:55 PM   #7
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The only way to maintain a good FICO score is to borrow money (credit card or a loan) and pay it back.

I'm a Dave fan and we are completely debt free. I continue to use our PenFed Cash Rewards card just for the rewards, paying it off every statement. Our scores have remained high.

Lately on his show he's been asked how long it takes for your score to go to zero and he's been telling people that it drops in 6-9 months. He says that if you have a zero FICO score and want a mortgage that you need to find a bank that will do "manual underwriting" which is when a mortgage company looks at your assets and income to make a decision instead of just using your FICO score. He recommends Churchill Mortgage for this but other lenders may also be able to do manual underwriting.

I'm comfortable continuing to use the PenFed card. I'm a very careful spender and do not enjoy shopping so I don't really worry about misusing a credit card.

Check out the website - www.daveramsey.com There is a lot of good content there including archived radio shows. I've never joined his subscription Total Money Makeover or gone to his live events or enrolled in Financial Peace University or purchased a book, I just got them from the library and I listen to his radio show online and we were able to do it all.

Good luck to you.
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Old 12-13-2010, 03:59 PM   #8
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I guess I should mention that the reason we rent instead of buying now while interest rates are so low, is that my wife & I don't live in the same place, and probably won't until I retire. She's in NW Louisiana, and I'm in east Texas, where my job is. She will be working about 3 years after I retire, and she loves her job, wants to keep it until she retires. I work a 4 day week, and travel 125 miles to where she is on weekends. We currently have 2 apartments, and while I don't care much for apt life, it's what he have to do for now. If we bought a house now & made payments, most of the payment would go to interest. With maxing into our retirement accounts, we couldn't afford to pay any extra on the mortgage. I believe our best bet is to pay cash for a house when I retire....therby paying zero interest. I dunno if it's the best plan, but if you read brewer12345's signature line, I think that pretty much sums it up! If he doesn't mind too much, I'll borrow it for a minute.......

"Everyone has a plan, until they get punched in the face." - Mike Tyson

brewer, forgive me, I promise to never use it again! It just makes sense, though.
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Old 12-13-2010, 04:07 PM   #9
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I just watched a WSJ housing reporter being interviewed this morning about how difficult it is to get a loan. Everybody is cracking down on lending and the underwriters are being tough. There's money to be loaned, interest rates are ridiculously low, but many people are not getting approved. The upside is if you have good credit and can document a regular salary that you will probably get a loan at a good rate. But if you have problems, especially self-employed types who show any passive losses, it can be almost impossible to get a loan.

I've kept all of my credit cards, and use them for everything while paying off the balance each month.
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Old 12-13-2010, 05:11 PM   #10
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What are some good ways to maintain a good FICO score without using a credit card?
I haven't had a credit card since I was 22. When I applied for my first mortgage almost 3 years ago my scores where 795-805. All I did to get that high score was never make a late payment and pay off 3 car loans much earlier than scheduled. If my income wasn't low($45K) I'm sure I would've been near perfect score.
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Old 12-13-2010, 06:07 PM   #11
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I like Dave Ramsey and respect his opinion. I am sure his approach is a good one for people who have problems with debt, just like AA's program of not having any drinks is smart for problem drinkers.

However, most of the people on this forum don't strike me as folks who have a trouble with handling debt. I know we've had this discussion before but I don't understand why you shouldn't have a credit card especially one with reward feature and use it if not for every purchase at least the major ones. I can believe that having a credit card makes it easier for people to purchase items on impulse. However, most responsible people (i.e. forum members) don't make major purchases TV, computer, appliances etc. without having the money to pay for them. I would think that
having a credit card that use on a fairly regular basis would keep your FICO score at good level, and provide you with a nice cash rebate at the end of the year.
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Old 12-13-2010, 06:44 PM   #12
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I understand car and home insurance are tied to your credit score and/or credit history. Not a huge deal, but you might be paying 20-50% more for this insurance if you have marginal credit. I used to have less than perfect credit (six figure credit card debt always paid on time) and I believe they marked my auto insurance up around 20% based solely on DW and my credit profile.
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Old 12-13-2010, 07:24 PM   #13
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Originally Posted by RetireUnder40 View Post
I like a lot of his ideas about snowballing your debt and staying away from debt altogether.
My only concern with this is that it will basically kill your FICO score. We are looking to purchase a home down the line with a large downpayment after we kill this debt. He claims you don't need to use your FICO score but I don't see how this is possible and also I believe having a poor FICO could hurt us in other ways in the future.
Can anyone provide some insight on this? How important is the FICO? What are some good ways to maintain a good FICO score without using a credit card? Is this another area Ramsey is incorrect on?
Thanks in advance!
To achieve true DaveRamseyvana you must save all your money and pay cash for that house. A FICO score you do not need.

But otherwise, if you're a human being instead of a debt Jedi, then you'll use the credit card a few times a month to maintain a flawless payment record, and then you'll have a 750+ FICO.

Another ding to a FICO is having multiple queries on your credit report if you're financing purchases through car dealers or department stores, or applying for numerous credit cards. So by not doing any of that in your debt-free lifestyle, you're helping to maintain your score.

By using cash to shop Craigslist, garage sales, & thrift stores for a lot of consumer purchases, you'll avoid the credit/debt traps. Or I guess you could just not spend as much as you used to.

And yes, I think you want to keep a credit score with FICO. We just refinanced our mortgage with PenFed.* It went as well as one could reasonably expect a refi to go, with one of the best lenders you could reasonably expect to find, and it was still sheer hell. If it was not our 10th refi then I would have given up in sheer baffled frustration. Throughout the process I occasionally found it necessary to remind the PenFed staff that we had $%^&in' 800+ credit scores, and did they think they were going to find someone better to loan that money to, or were they going to give it to us? I can only imagine how much more miserable we'd have been (and how much more we'd be paying) if we tried to do it without a FICO.

* We signed the closing documents last Wednesday. The loan was supposed to fund today. The wire transfers are supposed to happen tomorrow. When I'm pretty confident that no one can reverse the process then I'll post about our refi experience. They've richly deserved earned every comment I'm going to make.
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Old 12-13-2010, 07:55 PM   #14
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I doubt you will drop your FICO score much between now and the time you purchase the house. We are Ramsey fans with only a single credit card to our name and have very high FICO scores, even after paying off the mortgage and eliminating other debts.

It takes a mighty long time to drop completely off the FICO radar and as long as you have one current card and clean records on the ones you've closed, you'll be fine.
+1

BTW, the debt snowball method was very effective for us years ago. We kind of did Dave Lite though. Couldn't bring ourselves to stop 401k matching contributions while paying off debt. We still wiped out a slug of debt in 2 1/2 years.
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Old 12-13-2010, 07:57 PM   #15
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Originally Posted by clifp View Post
I know we've had this discussion before but I don't understand why you shouldn't have a credit card especially one with reward feature and use it if not for every purchase at least the major ones. I can believe that having a credit card makes it easier for people to purchase items on impulse. However, most responsible people (i.e. forum members) don't make major purchases TV, computer, appliances etc. without having the money to pay for them. I would think that having a credit card that use on a fairly regular basis would keep your FICO score at good level, and provide you with a nice cash rebate at the end of the year.
Agreed. Though, I believe Dave says you spend less if the green stuff is physically passing through your hands. That makes sense, but I believe I'm the exception. Of course, I'm part of the 95% that think they are above average drivers.
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Old 12-13-2010, 08:13 PM   #16
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We also did a "Dave Lite". I felt that a $1000 Baby Emergency Fund was too low for us. We were a family of 4 with a 50+ year old house, 3 older cars and a kid in college so only $1000 savings was not reasonable to me. I think we kept it between 4,000 and 5,000. We did the snowball for only about 8 months (paid off 2 cars and a credit card) and then went into emergency savings mode for the next 2 years when my husband felt his job was no longer secure. Kept saving as much as we could and by the time he lost his job and retired we had saved more than enough to pay off everything else, a credit card and 2 student loans. The house had been paid off years before.

Doing the debt snowball makes you feel very powerful and in control. I hated to have to stop but it enabled us to save large amounts for our impending emergency.
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Old 12-13-2010, 10:35 PM   #17
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My only concern with this is that it will basically kill your FICO score
You don't get a high credit score by being in debt. You get a high credit score by making all your payments on time, not borrowing all of your outstanding credit line, etc. Google "key fico score criteria" for details.

Personally I have a modest home mortgage (perhaps 60% DTE), and a very small student loan (~$4K).

My credit score per CreditKarma is 781 at the moment. They say it would be higher if I used more of my credit lines (I'm at 0% utilization) and had a longer average age (I'm at about 4 years). The latter is due to an App-O-Rama I did a few years ago and having something like 30 new credit lines that are less than a few years old. That will heal in time.

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Old 12-14-2010, 07:58 AM   #18
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You don't need to have a "lot of debt" for a high FICO score. You just need to have a long history of obtaining credit, using it wisely and paying it off on time when you do accept a loan. As mentioned earlier, when I "what iffed" my score (right around 790, I think), it still could have been like 20 points higher higher if (for example) I had a mortgage (in good standing) instead of owning our home outright. Yet at some point, "high enough" is good enough and I think anyone over about 750-760 is probably there. And there's no reason to take debt you don't need to get any higher, as you're already in the range that would be approved for the best rates and terms in most cases. And there's no way I'm going to take out a home loan just to gain a few more points when we're already in the "good enough." And besides, other than credit cards we pay off every month I don't plan on ever needing to obtain credit again. Could happen, but we're not planning on it.
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Old 12-14-2010, 10:22 AM   #19
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I've read Ramsey's book too and although he can be a bit extreme I suppose that path is necessary for some people to get a grip on reality. He essentially says "live like a pauper" until all debt is gone. I'm more relaxed about that, I just wanted to see steady progress in that direction after I bought my house in 1985. It was paid off in 14 years.

We have three credit cards that we use regularly for convenience and pay off in full every month. No other debt, no mortgage, no car loans, nothing. I have no idea what my FICO score is and don't care, since our days of being slaves to the credit industry are over.

Since you plan to buy a home in the future you will want to maintain sterling credit, both to be able to get mortgage in the first place and to get the lowest possible interest rate. One way to do that is have a few credit cards and pay them off on time. It doesn't matter if you pay any interest fees, just as long as the payments are on time and you don't max out the credit limit. For example, if you have a cc with a $5k limit, avoid having an outstanding balance at any time of more than half that, or $2.5k

It is simply a matter of having a track record of showing the potential lender that you can resist the temptations of the marketplace, live within your means, and keep your promise to pay back the loan as agreed.

About 25 years ago a guy at work did have a hard time getting a home mortgage because he had always paid cash for everything and therefore had no credit history. He didn't have bad credit, just a blank slate, and lenders (understandably) want to see some evidence that making the loan is a reasonable risk for them. That's a situation best avoided.
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Old 12-21-2010, 02:24 PM   #20
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I have a good FICO score. My cabin was paid off 20 years ago. I use one credit card which I pay off every month. Otherwise no debt.
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