Credit Card Debt

by Craig Shelburne

You might consider your credit card debt under control, but financial guru Dave Ramsey bluntly disagrees. Carrying a balance — no matter how small — is financially unsound, he says.

“There’s no point in it. It doesn’t build wealth for anybody but the bank, so if you have debt, you need an alarm going off, period,” says Ramsey, an author and syndicated radio talk show host. Borrowing money at 18 percent is a bad idea, he says.

Ramsey is an anti-debt crusader who encourages getting ahead by living within your means. Erasing debt is crucial, and he suggests following three steps:

Cut the cards. Go for “plastic surgery,” Ramsey says. “Get ’em all out and cut ’em up, and close the accounts to further charges.” Use a debit card or pay by check or cash whenever possible.

Save $1,000 first. Be prepared for the unexpected with saved cash, rather than credit. “The cards are the emergency fund (when you’re in debt), and you’ve got to replace that with something,” he explains.

Roll a snowball. “List your debts, smallest to largest. Then pay the minimum on everything except the little one. Every nickel you can squeeze goes (to paying) that small debt,” he says. “When that little debt is gone, take that payment and any other money you can find, and put it on No. 2. When No. 2 is gone, the snowball rolls over again and picks up more snow. Payments ... are now applied to No. 3.”

The notion of taking out a loan — a home equity loan, for example — to pay off debts is wrong. “You cannot borrow your way out of debt. It’s like trying to dig out the bottom of a hole to get out,” he says.

Consolidation rarely does the trick either, he advises. “You package all your debt together, get a lower interest rate and a much lower monthly payment, but you stay in debt longer and you don’t change the habits,” Ramsey says. Such habits include continuing to buy new furniture on revolving credit, or using credit cards to take the family out to dinner.

Those who think bankruptcy is the answer should think again, warns Ramsey, who once declared personal bankruptcy. “It is not a method of debt reduction,” he says. “It is a psychologically scarring, shame-ridden, guilt-ridden event, and anybody that says otherwise has never been through it.”

Achieving financial peace, Ramsey urges, means rejecting instant gratification and adopting a save-and-then-spend mind-set.

first appeared: 6/18/2000