I’m sure most of you have heard of Dave Ramsey (he seems to be everywhere these days), but for those of you who haven’t, Dave Ramsey is a popular financial guru –he has a radio show as well as a TV program on the Fox Business channel.

Dave teaches what he calls “The Baby Steps“. The Baby Steps comprise of 7 steps that Dave believes anyone can take to achieve wealth (or as he calls it, “financial peace”). Dave outlines these steps in great detail in his book, The Total Money Makeover.

I first read his book about a year ago and I have been listening to his free podcast on iTunes for about 4 months. I definitely recommend this book to anyone who is just starting to get a handle on their personal finances.

The process Dave uses in The Total Money Makeover is to take the reader through a journey as though they are completing each baby step during the read. Before discussing the particulars of each step and the subsequent reward, Dave methodically strives to hammer one idea into the reader’s head: Your money problems are your fault and it’s only through self-decipline in handling money matters that you can achieve financial peace. Basically he says that his steps will only work if you change your behavior in regards to money. I couldn’t agree more.

I am not going to review each one of Dave’s baby steps in this post (you can get them from his website), but I want to touch on the first two and express what I believe to be inconsistent (and potentially unhelpful) advice. I’d also like to open the discussion up so please comment or email me with your thoughts.

Dave’s first baby step is to save $1000 in an emergency fund –that is, money that should only be used if you find yourself in dire straits while you’re working on baby step 2.

As a prelude to outlining baby step 2, Dave suggests that you get intense and do something drastic: cut up all your credit cards (he calls this a “plasectomy”). He tells the reader to close all credit card accounts that are paid off and pay off any credit card account with a balance as quickly as possible and then close the account.

Baby step 2 says to pay off all your debt (except the house), smallest to largest. At this point, he is assuming the reader has sworn off credit completely –forever.

This is where I find several inconsistencies. First of all, there is a big fat elephant in the room which Dave cannot avoid: closing all of your credit card accounts is going to ruin your credit score.

Dave’s response to this is simple, but in reality, misleading and unhelpful to most people. Dave says that people ought not concern themselves with their credit score. After all, having sworn off credit himself, he doesn’t even have a FICO score.

Dave claims that if you use his baby steps you will become rich, and I believe him. However, it should also be noted that even he admits this process takes decades. Do you want to pay an extra $50 per month on your car insurance until you become rich because you don’t have a FICO score? I don’t. Your car insurance premium is only one out of dozens of problems that will arise in your life with a poor (or no) credit score.

Do you ever want to get a decent rate on a mortgage? This is debt that Dave permits, by the way, because even he realized that most people cannot simply save $150,000 or more. Nonetheless, there is no such thing as a mortgage lender who doesn’t at least look at your FICO score. I dare anyone to find one, honestly.

Aside from the problem of ruining your credit score, the inconsistency really lies in the fact that prior to this, as we have discussed, Dave says that we need to become disciplined in money matters, yet at the same time he tells us that we lack the self-restraint to maintain an open credit card account without charging it off. The point is that anyone who lacks the ability to not use their credit card, more than likely also lacks the ability to save their $1000 emergency fund just for emergencies.

This all, of course, is a journey where we are suppose to acquire the skills to be successful with money, and this requires that we teach ourselves self-restraint rather than destroy the ability to be tempted.

Again, I wholeheartedly treasure Dave’s overall financial advice –it’s a real gem. However, I would kindly suggest that anyone who is starting with Dave’s Baby Steps, reconsider closing your credit card accounts. After all, with a little self-restraint taught by Dave Ramsey, it’s just as easy to put your cards in a dresser drawer and not use them.

We are a military family and move often. We had one open bank account in our old home town that we never used, but since we both had to be present to close, just have never closed. My husband paid a bill online a while back but clicked the wrong checking account and paid it out of this account by mistake, which did not have enough funds.

Since we never use the account whenever we get mail from them I simply throw it in the bank statement pile and never look at it. Then, I got what looked to be a debt collection notice, which I found wierd since we have great credit and aren’t over due on anything. Since the overdrawl had not been paid off in 90 days they closed our account. I of course paid it right away, but how bad will this bank account closure affect our current credit and for how long?

My Response

Hi [name removed],
It sounds like it never went to a collection agency and the notice was just from the bank. A bank closure itself does not negatively affect your credit –an overdraft fee that went into collections, however, does.

I think your best course of action would be to call the bank and kindly explain to them the situation just like you did in your email to me. More often than not you will find that small local banks are usually helpful with these types of situations. However, if you are dealing with a large bank such as Chase or Wells Fargo, your chances of resolving this are slim. Nonetheless, if in fact the overdraft did go into collections, it will remain on your credit report for 7 years and it will have a significant effect on your credit rating. It is for this reason, I strongly suggest you try to work with the bank as to ensure nothing is recorded on your credit report.

I have two negative accounts on my credit report that have been sitting there for a few years. Other than those, my credit report has only accounts that are on time. I have recently started to try and really jump my credit score up and was wondering if these were even worth putting my time and money into fixing, or will these slide off of my account eventually? I have always wondered when exactly the 7 year rule goes into effect. My first account was first reported in March of 2002 and was last reported on in 2007. My second account was first reported in April of 2005 and last reported in May of 2005. Does the 7 years start tolling from the first reporting date or the last?

My Response

Hi [name removed] -
Those two accounts are pretty old and I personally wouldn’t spend a whole lot of time trying to get them removed. They are so old that the impact on your credit is pretty small. I know it feels like an itch that you really want to scratch, but they will be gone in no time. Regarding the 7 year rule: In most cases it all has to do with what is actually being reported –that is, you are looking at 7 years for each negative entry. Therefore, if the first negative entry was reported in March of 2002, you are looking at 7 years for that entry. Each month a negative entry is reported, that entry will remain for 7 years. In other words, don’t look at the account as a whole when attempting to figure out when the account will be removed –look at each individual negative entry associated with that account and figure that that entry will remain for 7 years.

Hope this helps,
-Ryan

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1. Collectors are trained to toy with your emotions for a very specific reason.

Do you ever wonder why collectors act so merciless about your situation and further, why they seem to go out of their way to embarrass and degrade you? The answer is simple, yet often overlooked. Collectors are specifically trained that the fastest way to get a person to pay is to exhibit behavior of such disgust and ruthlessness that the person simply says, “I cannot deal with this human anymore, I will pay them just to go away!”. If you keep this mind, these tactics will become transparent and ineffective.

2. Asking to speak to a manager will get you nowhere.

It’s important to realize that a “manager” at a collection agency (at least the ones that they’ll ever let you speak you), are not really there to make sure their collectors are treating customers fairly. Rather, the managers are there to make sure the collectors are getting you to pay –because, of course, that’s how they get paid. If anything, the manager will treat you even worse. Also, why do you think they are manager? Likely, they are running the show because they are very good at getting you to pay and as we have already discussed, this usually means behaving very erratic. Don’t waste your time with a manager.

3. Never make a deal without getting it in writing.

If you have been a longtime reader of this blog, you have heard this a million times. Yet, when the time comes, still some people tend to get flustered and agree to a payment plan over the phone. What do you think happens when you do this? Most of the time they will clean out your bank account and you will find there is nothing you can do because they will simply say, “Well, you owed the money”. You can’t sue them because you have no proof. Again, any agreements should be made in writing before you give a collector access to your bank account.

4. Debt collectors are more willing to negotiate on older debts

The next time a collector contacts you regarding a 10 year old debt, don’t be afraid to offer them a settlement of pennies on the dollar. Many collection agencies purchase old debts from various companies after the company has written off the debt. Therefore, even if the settlement amount may seem small, keep in mind that as long as the collection agency makes a return on their investment, they will be happy.

5. Collectors do not care about your situation

It’s difficult to make smart money decisions when you are emotionally tied to the situation. Collectors know this when they call you a “deadbeat”. You must detach your emotions from the situation and consider it in the same way collectors do: this is just a business transaction.

Come back soon for Part 2 of this series!

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Dear Ryan,
I have a department store credit card I use occasionally. I had signed up for electronic statements which I was receiving with no issues for over a year. In April, I started getting phone calls with no messages for several days – always on my home phone while I was a work. By chance, I did a reverse phone lookup and found out it was Kohl’s collections. I called Kohl’s and found out I was near 90 days past due on a $19.23 balance that was due in February. I had not received ANY communications from Kohl’s for over 3 months.

The last statement was the month prior to this missed statement which was paid in full. They agreed to remove the late fees and finance charges and I paid the balance in full immediately. They also said this wouldn’t show up on my credit report. Well, it’s showing as a 30 days late payment. I called Kohl’s several times, and they say they have reviewed my account and will not re-age it to fix the problem. What else can I do? I’ve had PERFECT credit for 30+ years!!! I’m certainly never receiving electronic statements ever again! Help!

My Response

Hi [name removed],
Unfortunately you have learned the hard way that collectors are filthy liars and should never be trusted. Also, because you do not have this agreement in writing, there is little you can do. You could keep bugging the hell out of them (that is, call them everyday) and you might get them to budge.

Personally, however, I would not bother with this. In the long run, this is a small mistake and will only negatively affect your credit for a couple of years. I understand that it’s annoying to have this little ding on your 30+ years of perfect credit, but unless you’re in the market to purchase a home, I would brush it off and, rather, declare it as a lesson learned –the lesson being: always get agreements between you and collectors in writing before sending them any money.

Hope this helps,
Ryan

Take Home Point

I wrote an article awhile back entitled, “3 Ways to Get a Late Payment Removed From Your Credit Report“. In this article, I stated that a hiccup (i.e., a single late payment on an account with otherwise clean history), will sometimes be simply forgiven if you ask them. However, when you are dealing with a collector, you must keep in mind that any verbal agreements mean nothing because collectors are liars. If you are attempting to negotiate a late payment, make sure that any agreements are issued in writing before you pay them. Many times they will send you a letter stating the agreement and you’ll be golden.

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Dear Ryan,
I had a credit card that that the bank closed because of late payments. I know I have been paying on time and paid the credit card off 6 months later. The bank has offered to open the account again, but I am curious if this is a good or bad thing. On my report it says closed by creditor, if it is reopened will it just show opened?

My Response

Hi [name removed],
Generally, open credit card accounts look better on your credit report than closed accounts because open accounts show you have used the card responsibly –the card hasn’t been “closed by creditor“. Before doing anything, I would ask the creditor if they are going to open a new account or simply reopen the account they closed. If they are just going to open a new account, the “closed by creditor” entry on your credit report will remain and a new entry for the new account will be reported –this won’t do you any good. However, if they are actually reopening the closed account, this could possibly improve your credit because the “closed by creditor” entry will be changed to “open”. I would ask this before making a decision.

Hope this helps,
Ryan

Take Home Point

Credit card accounts marked as “open” on your credit report are generally better for your credit score than a closed account. This is due to a couple of things: First of all, an open account is building payment history. Payment history has a big impact on your credit score –the more history (positive of course), the better your score will be. Secondly, an open account indicates that you haven’t screwed up so bad that the creditor closed (or charged off) the account. Therefore, if given the opportunity, it’s wise to ask the creditors of any closed accounts on your credit report to consider reopening the account.

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Hi there,
I had a bill due around May 2nd, but was not able to pay the bill until May 29th. However, the creditor reported it on my credit report as a late payment. I heard that the creditor only shows deliquencies after 30 days. Am i correct?

My Response

Hi [name removed],
Generally it is the case that creditors only report late payments that are 30+ days late. However, this is not a rule and the creditor could technically report it late at their discretion (given that the payment was indeed late). Nonetheless, I would at least give them a call and ask if they will give you a break and remove the negative entry –you might be surprised.

Hope this helps,
Ryan

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Con artists often exploit our fears to take our money, and right now there are many families in fear of losing their homes. Scammers who promise to stop foreclosure are out to make a quick buck and can turn a homeowner’s distress into disaster.

Today, the FTC and its partners announced new law enforcement actions against deceptive foreclosure rescue companies. Along with the announcement, the FTC released “Real People, Real Stories ,” a video about keeping your home. It features people targeted by foreclosure rescue scams and advises homeowners in distress that free help is available from the Homeowner’s Hope Hotline at 888-945-4673.

Dear Ryan,
I did not give a debt collector my bank account number, but I saw they tried collecting from my account. Is there any other way for them to get my account information, legally? Or should I pursue legal actions against them?

My Response

Hi [name removed],
There are a couple of things you should do before pursuing legal action. First, you need to verify and be certain that it was actually this company that was attempting to collect from your bank account. I say this because unless you gave them your bank account information, there is no way they could have legally obtained it. Furthermore, they need your permission before they can take any funds from your account. Second, if you have determined that it was indeed this company, I would call them and yell at them for awhile about this issue. I would do this before pursuing legal action because lawyers aren’t cheap and you don’t want to be hasty about getting a lawyer and filing suit.

Hope this helps,
Ryan

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Hi Ryan,
How soon will my credit score improve after I pay off my debt?
I am trying to figure out what is important. I was hoping you might be able to give me some insight.
Thank you in advance.
[name removed]

My Response

Hi [name removed],
I wouldn’t expect a huge jump in your credit score after paying debt off –the FICO score is, of course, largely based on you having debt. However, this is not to say your score won’t raise after you pay off debt. This is because you will be lowering your debt to credit ratio. Your debt to credit ratio should remain low if you want to maximize your credit score.

Hope this helps,
Ryan

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