Dave Ramsey Financial Peace University: Week 5

This week’s lecture was about credit reports, credit reporting bureaus, identity theft, and collection agencies. Quite a scattering of topics. The first part of the class was on credit scores and credit bureaus. Dave makes the point that a FICO score is an, “I love debt score” because the only way to get a FICO score is to carry debt. Technically this is true and Dave is very proud of the fact that he doesn’t even have a credit score because he’s gone so long without carrying any debt. He argues that your goal should also be to not have a FICO score. However, Dave’s assertion that you don’t need a credit score is wrong for most people.

Even if you never want a loan or a credit card you need a good score if you want to keep low insurance rates, be able to rent an apartment, or pass the background check for a job. It’s sad but true that our credit scores are used for more than determining our credit worthiness. For someone like Dave this may not matter. Chances are he’s not going to be renting an apartment any time soon and, if he did want one, he himself admits that he could just buy the whole apartment building. He has his own business empire so I doubt he’s worried about employment background checks and, since I’m sure he buys his insurance from his preferred providers, he probably gets a hefty discount. In other words, if you have a ton of money and influence, a credit score isn’t necessary because you can get by on your own. However, for us regular Joe’s, a decent credit score is required to get through life. Even as the members of this class pay off debt they still need to keep a decent score and that means keeping at least a credit card or two or a mortgage.

Dave also argues that a good credit score is often an indicator of a bad financial life. This is one of those blanket statements that raises my hackles. While it may be true that if you have a great credit score you have a lot of debt, it is also just as likely that you do not. Poorly managed debt, whether a little or a lot, is what leads to a poor score. If you have modest debt, say just a mortgage and two credit cards, but you make all your payments on time and you pay off the cards in full every month, you are likely to have a very good credit score. This is not someone who has a bad financial life. However, even that modest amount of debt can lead to a bad score if you are late on payments or rack up the cards close to their maximums. You can’t judge a person’s financial health solely by their score.

If you’ve ever wondered how your FICO score is calculated, Dave shares this formula from someone who helped devise the score:

  • 35% is based on your debt history
  • 30% is based on your debt level
  • 15% is based on the length of your debt
  • 10% is based on the type of debt you’re carrying
  • 10% is based on new debt, or what you’ve opened most recently

After the FICO score, Dave moved on to credit bureaus and credit reports. This part was more interesting to me because he drives home the importance of checking your report at least annually and correcting any errors or inaccuracies. He outlines the process for doing this and gives sample letters and addresses for the three bureaus. It’s very helpful stuff. He also talks about getting your name off of many of the mailing lists by signing up at OptOutPreScreen.com and removing your name from telemarketing lists by registering at DoNotCall.gov. Both will cut down on the amount of junk pouring into your home and reduce the number of credit card and loan solicitations you receive. I’ve been on both lists for several years and I can attest that it really does work. We get much less junk mail and fewer calls now than before.

Then Dave moves on to identity theft. He covers what to do if you’re a victim and gives you information about whom to contact to resolve the problem. During this portion of the lecture, there is a pitch for Zander Insurance. During the lecture and in the book he does not mention them by name, but he does say something to the effect of, “Visit my website to learn about the identity theft protection I recommend.” When you get to the website you see a link to Zander Insurance. If you listen to Dave on the radio, you know that Zander is one company that he pitches constantly, and it appears that FPU is no exception.

This annoys me. It’s not just the pitch, although the constant advertising in FPU is starting to bug me, it’s that what he does not mention is that this insurance is something you have to buy. He says, “See what I recommend for identity theft protection,” not, “See the insurance policy that I reocmmend.” You may go to the site thinking you’re going to find tips on protecting your identity, but it’s really an insurance pitch. It’s yet another thing for people deeply in debt to spend money on. The thing is, you can protect your credit yourself for free and anything you lose as a result of ID theft should be returned to you, insurance or not. Yes, it will take some time and work on your part to clean up the mess, but it is totally possible to clean it up and owe nothing on your own, for free. This is what he should be teaching people who are in debt, not urging them to buy more insurance.

Finally he moves on to how to deal with collection agencies. He talks about the rules that collectors must follow and your rights when dealing with them. Of course he shares some horror stories, but he does point out that if you are reasonable, honest, and fair with them (and you call them on their B.S. tactics) then you are likely to get the same treatment in return. He gives some sample letters and financial plans that can make getting creditors off your back easier. At no time does he advocate dodging any debt that you honestly owe.

His “Pro Rata” plan has you paying as much as you can on your debts based on the percentage that the creditor represents of your total debt. So if you have $200 per month that you can use for debt repayment, you apportion that out amongst all of your creditors according to how large your debt to them is in terms of your overall debt load. The creditor who represents 50% of your debt load gets 50% of your $200, or $100. The creditor who represents 20% of your debt load gets $40 and so on. When you explain to your creditors that this is how you’re doing it, most of them back down, even if they aren’t getting the minimums because they can see you are working a plan and at least you’re paying something. Yes, your credit score will take some dings doing it this way but since it’s probably already pretty beat up, a little more won’t hurt if it’s what has to happen to get you on track.

All in all, this was a useful lecture. There is a lot of helpful information and good resources included. Even if you don’t have debt problems you may one day need to know how to deal with identity theft or how to fix something on your credit report. This was information that everyone can use.

When we moved to small group is was revealed that, of the thirty households (out of fifty that are enrolled in the class) who chose to disclose their debt (not including mortgages) there is a total of $1,155,000 in debt in this class. That works out to be about $30,000 per household. This was one of those moments where I sort of choked. I get it: If you buy one new car you can easily hit $30,000 right there. I see people all the time who are in debt trouble, but I never really put a number to most of them. To know that most of the households in that room are dealing with that kind of debt load was a sobering moment for me.

We also had a woman share that her household has been routinely paying $22,000 per year in non-essential household expenses such as cable, Tivo, extra phone lines, calling features, cell phone plans, and super-speed Internet access. Since starting this class they have managed to cut this down to just over $8,000. That’s a huge improvement, but to me that still seems awfully high. I don’t spend that much per year even when I include essentials such as power and water. Ouch.

Our small group did have some other victories this week. Someone paid off a $200 credit card and someone else paid off a $300 furniture loan. A couple more people reported finishing the $1,000 emergency fund. All in all, though, our group has been getting smaller and quieter week by week. I don’t know if the no-shows are out sick or if they’ve just bailed out on the class. There have been some bright spots, but mostly people keep to themselves and don’t seem to want to talk. Maybe it’s getting too late at night and people are tired, or they just don’t want to talk about their money issues. Whatever the reason, I’m hoping it turns around because the group is the most interesting part, to me.

On the FPU website this week I was amused to find a link entitled, “Credit Rebellion.” I was curious as to what this was about, so I clicked on it. It brings up a .pdf letter that you are supposed to stick in the postage paid envelopes that credit card companies send you when they send out credit offers. Instead of returning a completed application, you return this letter. I doubt I can reprint it here due to copyright but the gist of it is a rant, on behalf of Dave Ramesey listeners, against the credit card industry and its practices. It’s addressed, “Dear Credit Shark,” so this should give you some idea as to where this is going. It’s amusing, but I’m not sure I’d send it to a credit card company. They already know that they are dealing in iffy practices, so wasting paper to tell them that seems futile to me. But, if you have a grievance I guess it’s a harmless way to register your displeasure.

Homework roundup: We get an easy week this week. In addition to reading a couple of chapters in Financial Peace Revisited, we have to get a copy of our credit report from AnnualCreditReport.com and check it for accuracy. You’re entitled to one free report from each of the three reporting agencies each year. I do this three times per year and I just did it back in January. I use a rolling system where I check one report (from a different agency) every four months. This way I always stay on top of my credit and can catch potential identity theft early. I won’t be checking again this week because it will throw off my system, but the most recent check revealed no inaccuracies or errors in need of correction.

Next: Dave Ramsey Financial Peace University: Week Six

This is a series of posts about what you will find in Dave Ramsey’s Financial Peace University course. You can find the previous posts here: week oneweek twoweek threeweek four)

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6 Responses to Dave Ramsey Financial Peace University: Week 5

  1. Rick says:

    I agree with your FICO Score assessment. For us less than wealthy people, a good FICO Score is a necessity.

  2. Jackie says:

    When I get an unsolicited credit card application, I simply cross out the various sections and write “please take me off your list” in marker. Works and is totally free to me. I hardly ever get any junk mail from credit card people anymore.

    I have to agree, for most people a good FICO score is at least very useful. There are plenty of people out there who don’t really need it, who aren’t rich, but the majority of people in America today do need it for insurance, home loan interest rates, credit checks at work, etc. I think it’s a tad irresponsible to simply advocate that you don’t need it, instead of explaining why you may or may not.

    I’m so glad he gave info about checking credit reports though. It took me about 3 seconds to google this statistic:

  3. Rhonda says:

    FICO scores are only important if you want more debt, (a car loan, mortgage, etc.) If you pay for a car with cash, pay off your house and credit cards, FICO scores are meaningless. As time goes on, and banks continue their terrible debt toll on the American public, more folks will pay off their cars and keep them practically forever, pay off their houses and stay put and learn to live without credit cards. Banks will suffer because they will no longer be able to use higher interest rates to gain wealth at the expense of the consumer via FICO scores. Become as debt free as possible and work for yourself. This is essentially what Ramsey is saying.

  4. Robert M says:

    I do appreciate your synopsis of each lesson. I admit I have not read them all, but the ones I have read have been informative.

    However, I have to call you on a couple comments you made and maybe get clarification.

    You stated “Even as the members of this class pay off debt they still need to keep a decent score and that means keeping at least a credit card or two or a mortgage.”

    I am not sure why anyone would want to continue to pay interest to save on car insurance. I paid $4,000 in mortgage interest last year. My car insurance cost was $1800. The math does not work. Also, many so called financial experts agree that we spend more when using a credit card. I have heard all the stories, and I thought me and my wife were different, but it turns out we were not. We were below the average but still spent more using plastic rather than cash.

    We have no credit cards and are quickly paying off our mortgage.
    Yes, we will loose the tax deduction. But, my calculator says it is better to pay the government $250 rather than paying the bank $1,000 to save paying the government $250. We will have a net gain of $750 without mortgage interest to deduct.

    Regarding the ID theft insurance. I agree that everyone could do what Zander does if your identity is stolen. I did it back in 1994. I have to say “WHAT A MESS!!!!”
    I will, and do, gladly pay the $12 monthly fee so I will not have to go through that time consuming mess again.

    Zander does not protect your identity. That is up to you. They only restore your identity and clean up the mess, reimburse expenses after it occurs. NO ONE can protect you from identity theft better than you. I do not care to pay for a company to monitor my credit.

    Thank you for sharing your victory stories. They are important for people to hear. I would encourage you to bring up during class some of the doubts you have. I am sure you are not the only one.

    Continue to question and search for truth.

  5. NoDebt2 says:

    Its absolutely NOT necessary to pay any interest whatsoever & STILL have an excellent credit score.

    A good FICO score is categorically NOT an “I Love Debt score.” It is an I LOVE TO PAY ALL MY BILLS ON TIME score. While I still have a small bit of a mortgage left, that is the ONLY interest I’ve paid in YEARS, but I DO pay greatly reduced insurance premiums — my insurer offers a discount for those who have excellent credit ratings (its actually an “I’m a Responsible Person Who is Less Likely to Have an Accident or Claim Score” as far as they’re concerned.)

    Many employers & almost ALL landlords use the FICO to quickly determine if the applicant is a good risk, based on if they pay their bills on time, and handle credit adequately well.

    Just de-bunking another Ramsey myth….

  6. Nolan says:

    “(CC companies) already know that they are dealing in iffy practices, so wasting paper to tell them that seems futile to me.” Why would you want to do business with someone like this if you believe they are not honest and forthright? You are making CC work for you, but you are the exception. One day they will turn around and bite you and you have to decide if the measley rewards are really worth the agrevation of keeping up with the bills, the occasional late fees and/or annual fees, etc.

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