We’ve moved to CHEAPENCOUNTERS.COM!!!

Bad advice from Dave Ramsey

Close Encounters of the Cheap Kind has a new home at www.CheapEncounters.com!

I spent a good part of this afternoon on the road, so I did something I don’t do very often. I listened to talk radio, specifically the Dave Ramsey radio program. Now, I am not extremely anti-Ramsey like some bloggers. I think Ramsey gives relatively good advice, provided that you understand that the intended audience is (or at least should be) the relatively uninformed that have already gotten themselves into financial trouble. In my view, his advice isn’t to send you to the top of the highest financial mountain, but should get you at least to sea level.

A prime example of this is his system of paying of debt. The basic concept is that you making a listing from lowest to highest of all of your debts and then work at paying them off, starting with the smallest debt and working upwards. If you know anything about accounting or finance this makes you cringe, as the system does not take into account the interest rate charged on these debts. In a financially prudent process, you would pay off the highest interest rate debts first since those are the ones that are incurring the most interest, ignoring the amount of the balance. Why would you pay off $1000 in debt over five accounts at 0% interest when you are incurring interest at 20% on a single account with a balance of $1000? But for the intended audience that has already proven they have trouble handling their finances, the system works because of the psychological effects of seeing more bills completely eliminated help the person keep with the program, although in the end you pay more interest than if you had paid the highest rate debts first and stuck with it.

Anyway, the bad advice from today was a question from a caller about a collection notice received on an old debt. The caller indicated he had received a letter for an old debt that was written off by the credit card company eight years ago, and asked if there was anything to worry about. The debt had been on his credit report and had recently fallen off because of age. Ramsey’s response was that this was a debt that needed to be dealt with immediately and encouraged the caller to contact the collection agency to settle at about 10% of the value of the debt.

BAD ADVICE! At this point, the debt is essentially uncollectable because of the age of the account. That’s why it fell off the credit report. Although it might sound counterintuative, if the debtor makes any payment of the debt it could cost him nearly, as the new activity will essentially make the account active again allowing the creditor to put it back on the debtor’s credit report. Even if he pays the account in full, it will still be listed on the credit report indicating the account was turned over to collection but later paid. If the debtor does nothing, it would probably never appear on the credit report again.

I am all for personal responsibility and paying one’s debts, however the potential negative effect on the person’s credit make pursuing a settlement a bad idea.

Advertisements

May 16, 2007 - Posted by | Education, Tips

1 Comment »

  1. It’s sick that a self-proclaimed financial “expert” gives bad advice so the poor feel better about themselves so he can sel more books. I would think that emotions might be what got many into financial trouble to begin with.

    Beyond that, it’s awful to take advantage of the poor and financially misguided by continuing to mislead them so they feel good and continue to buy his advice in the form of books. He’s making himself richer at the poor man’s expense.

    Comment by Sami | November 6, 2007


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: