Dave Says Credit Cards and Car Debt are the Same

Townhall.com ^ | March 6, 2013 | Dave Ramsey

[Kaslin]

Dear Dave,

My wife and I make $140,000 a year, and we’re working on our debt snowball. We’re almost out of debt, but we still have two small car payments and some credit card debt. She wants to get rid of the credit card debt but doesn’t mind us having car payments. Can you help me understand this?

Kelly

Dear Kelly,
I’m not sure I understand her thinking either. The car payments and the credit card debt are the same thing. They’re both debt payments, and you’re being charged interest on both of them. The only difference is that one is attached to a car and one’s not. It makes about as much sense as saying you like Visa better than MasterCard.

Even if she has some strange hang-up about car depreciation, that argument doesn’t hold water either. Cars go down in value whether you borrowed money to buy them or not. A $20,000 vehicle will be worth $10,000 in just a few years no matter what you do. A car payment won’t keep it from depreciating or slow the rate of depreciation.

Sometimes people get burned out or tired of paying the price to become debt-free. It can happen when you’ve been working on something for a while, and it seems like you’re never going to get there. Sit down and have a gentle, loving talk with your wife. Find out why she feels that way about the car payments and where the root of the problem really lies.

She may just need some support and encouragement from the man in her life. Remind her how far you’ve come together on this journey, how close you are to winning, and how much you love her. You’re too close to making your financial dreams come true to stop now!

—Dave

Dear Dave,

I’m 23 years old, and I was in the military for five years. While serving I received what is now $2,700 in Series EE bonds. Should I keep them?

Tammy

Dear Tammy,

If it were me, I’d cash them in and do my own investing with the money. Series EE bonds have a very low rate of return. They don’t pay much, and they’re not good long-term investments. They’re almost like keeping your money in a certificate of deposit over the long haul.

Investing is never a bad idea, and I know that may seem like a lot of money to you at the moment. But my advice is to cash out the bonds, find a financial advisor with the heart of a teacher, and invest the money in growth stock mutual funds with a good five- to 10-year track record. After that, get set up for auto-draft on your checking account and put at least $50 a month into your new mutual fund. That’s a much better plan!

—Dave

[driftdiver]

I’d pick the one with the lowest balance and work on it, regardless of whether its a car or a credit card.

[cuban leaf]

I’m not sure I understand her thinking either. The car payments and the credit card debt are the same thing. They’re both debt payments, and you’re being charged interest on both of them. The only difference is that one is attached to a car and one’s not.

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Gee. That’s pure, unfiltered bovine excrement.

Car loan at 2% interest and credit card at 12%. Plus, if I pay off the card and it gives me $15,000 of available credit, if I lose my job and have no savings yet (because I’m paying off all that debt) I can “live off it” for a bit. If I pay off the car loan and lose my job, leaving a hefty balance on the card, I’m outa luck.

It’s one reason life insurance is better than mortgage insurance. Which would you rather have if your spouse dies: The $200,000 remaining balance paid off on your house, or the house payment to continue, but $200,000 in the bank?

[brownsfan]

Dave must be losing his fastball.

Credit card debt carries 14% or more interest rate. Credit card debt is pure poison.

Car debt, even on a crappy loan rate is usually about 9%. Last car I bought, it was 3%, (on a used car).

[SeeSharp]

If your job is secure then get rid of the higher interest debt first. Usually that will be the credit card debt. If your job is iffy then get rid of your secured debt first. Defaulting on a car loan will cost you the car. Defaulting on a credit card will cost you some nasty phone calls and some bad credit but little else.

[dfwgator]

I suspect the interest rate on the credit card debt is higher than the rate on the car loan....knock out the higher interest rate debt first.

[cuban leaf]

I’m not sure I understand her thinking either. The car payments and the credit card debt are the same thing. They’re both debt payments, and you’re being charged interest on both of them. The only difference is that one is attached to a car and one’s not.

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Gee. That’s pure, unfiltered bovine excrement.

But wait! There’s more! If you pay off your credit card first, all that available credit improves your credit score, enabling a lower interest rate on future loans. Paying off the car affects your available credit not one whit.

[Graybeard58]

Credit cards are usually 10% or more interest, new car loans can be interest free and up, with 2.9% being common.

[driftdiver]

The lower balance is easier to pay off. Giving you more freedom and a sense of accomplishment. Making it easier to stay on your plan.

The difference in interest saved usually isn’t really that much.

[cuban leaf]

I question the advice of a guy that can be this wrong about something. However, if he is right, he needs to explain why our arguments are all wrong. It’s why I’m coming down rather hard on the guy.

[Kaslin]

Yeah, but only if you have a perfect credit rating

[driftdiver]

Dave’s point is to get out of debt, not maneuvering for a better position to go deeper.

[cableguymn]

I just pay cash for the things I need (except the house).. is my car new? nope. But it looks good and is reliable. That is all I care about.

Do I have the latest and greatest? Nope. But very few people need to be on the bleeding edge of technology.

I have a house payment. I make payments 4 times the amount it is suppose to be.

a year ago I didn’t know how I was going to make the rent on a mobile home.

Wow how things change.

[stylin19a]

though debt is debt,
car loan has a fixed payment, fixed interest and an end date. (generally)
Credit card is open-ended and has a variable rate-usually higher than an auto loan rate, and a variable monthly payment (generally)

[cuban leaf]

Dave’s point is to get out of debt, not maneuvering for a better position to go deeper.

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I get that. I’m adding the side benefit to getting the card paid off first. One can do with that information what they wish. But the larger point is that to suggest the two loans are the same is ludicrous. And it is inexcusable coming from a person who makes his living giving financial advice.

[Kirkwood]

Dave screwed up on that one.

[tnlibertarian]

Of course there are differences between secured and unsecured loans, and Dave mentions that. However, the point he is making is that they are both debt. And, they are. One of Dave’s mantras is the Proverb that the borrower is slave to the lender. So, in that way of thinking, interest rates, collateral, terms, etc., do not make much difference in the big picture. Many people point out that, contrary to Dave’s debt snowball plan, paying off the highest interest rate first makes the most financial sense. And, on paper, they are right. However, much of his advice is geared to folks that are not the most responsible financially. If they were, they would not be in this place to begin with. So, he encourages one to pay the smallest debt off first. That gives people a sense of accomplishment and can quickly make the number of payments they face each month a little less daunting. Then, they take the money they were paying on the debt they just paid off and apply it to the next smallest debt. Once again, not necessarily the cheapest in the long run if they are paying off the low interest debts first, but if it helps pay them all off versus giving up, it is much better overall.

The $15,000 of available credit is not needed with a fully funded emergency fund. Which is the idea with Dave. But, you are right; mortgage insurance is a waste. Besides depriving the beneficiary of the options when receiving cash, the premiums are much more than term life. Dave points this out in his advice, too.

[Celerity]

After a reading a few of your posts, I see there is a big problem here.

And that problem started before the question of xx% credit card debt and xx% car loan interest.

And even with the statement that a credit card can help soften the blow if you lose your job.

The problem that needs addressed is the one that got these people into debt in the first place, and even got them the approval for a credit card.

The best insurance against going hungry after the loss of a job is to never set yourself to lose a job. After years of lay-offs and firings, I myself realised that a “permanent” job was a gateway to disaster. Open your own business. Have a bunch of small incomes instead of one big one. This way when bad things happen, the carpet isn’t totally yanked out from under you.

But the car loan thing - Cars cost a LOT of money. They cost too much, in my opinion. The need for a new car dives people into crushing debt for years that isn’t made up for by the perceived “Better reliability” or “convertible top” or what-have-you.

And the credit card, when appropriated during good times, is only a gateway to disaster as well. Now a 50 inch LCD tv can be purchased instead of a 19” tube. I’m not saying you or anyone else doesn’t deserve such an item - But to jeopardize yourself and your family for it is just silly.

My wife gets me on to buy a TV . Even a $900 46inch blah blah TV that we can “Put half down on, this store is offering an approved credit”. First off, $900 buys a lot of ammo - Second, even if the TV is the best thing to ever happen to my eyes, nothing is worth taking that money out of our pockets in place of food, heat, and shelter. Nothing.

I realize that no one can save up for months (Or even years) of unemployment. I can’t either. In fact, I can do about 2 weeks of unemployment before things slip off the edge. But if you (Any of us) are setup in such a way that the edge is so close then it’s time - right now - to get out of the situation.

[cuban leaf]

The lower balance is easier to pay off. Giving you more freedom and a sense of accomplishment. Making it easier to stay on your plan.

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I’ve heard it said that it’s best to pay off the loan with the smallest balance regardless of the rate for just that reason. It’s what I did. That said, I have a car loan and two credit cards. One (the costco amex) I pay off every month. I use it for the dollars. I got a $450 costco coupon this year. That is REAL money that comes in quite handy. The other card is a higher rate than my car payment. I’m paying it off first to improve my credit rating (Higher available credit) and I’m planning on building a house this year on my property. But even if I were not, I’d still pay it off first. The reason is that if things were to go south for us, we would have that available credit, as opposed to a paid off car. In such a situation I’d take the availability of the card, with a car payment, rather than a paid off car and a card with a high balance.

[driftdiver]

I think Dave is focusing on the comment that she doesn’t mind having car payments. IMO it doesn’t really matter which is paid off first, the different in interest is negligible in the grand scheme of things.

I detest credit card companies so they are the first on my list every time. I’ll be so glad when I get mine paid off completely.