Dave Ramsey wants you to cut up your credit cards. He also wants you to pay off you smallest debt first, rather than the one with the highest interest rate. If you listen to his radio show regularly, you’ll notice a theme. Ramsey goes straight to the heart.
Rather than deal with debt problems from a mathematical view, he mostly makes prescriptions from an emotional view. And that’s not a bad thing, since spending issues — if not completely emotionally driven — usually have a huge emotional component.
Paying off high interest rate debt first and moving through to lower interest rate debt, will pay off more debt quicker, with a greater savings. But when emotion kicks in, the results won’t be what you expected.Â Paying off the smallest debt first, while not always mathematically the best choice, will give you an emotional boost and encouragement sooner than tackling a big debt. In a short(er) time, you’ll have one debt wiped out. Woot! You can see the progress. You can imagine doing it again and again. And so you do it again and again.
In the same way, having a credit card with scads of available credit just begging to be used — even if you don’t have the money to pay it off — can just be too tempting to those who need instant gratification. Your brain tells you one thing, but your heart tells you another.
In Ramsey’s world, you don’t make a debt elimination plan using only logic, instead you make the plan acknowledging how emotion influenced financial decisions — for good and bad.
So why do we use credit cards for virtually everything we buy? Because, with the emotional aspects well in check, credit cards have lots of advantages.
- Build a positive credit rating – you can start with a prepaid card
- Earn more interest — your money stays in your bank account for many additional weeks between purchase and payment
- Avoid carrying cash and/or other less secure payment methods – credit cards have all sorts of protections against fraud
- Accumulate reward miles or dollars for regular purchases – this equates to a real discount on everything you purchase
- Special features – most cards have multiple services offered with purchases, such as buyer protection (I once lost something I had just purchased and I was reimbursed), travel protection (can cover anything from car rental damage to canceled flights), extended warranties, etc.
Before accepting a credit card offer, check out the Federal Reserve’s Consumers Guide to Credit Cards. Educate yourself and then use your resources responsibly.