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

[Buckeye McFrog]

I’ve worked with a LOT of bankers and credit card companies at the corporate level. As a whole they are they most immoral and unethical people I have ever met.

Which is precisely why I fear (God help us) that this country is going to elect the second coming of Hitler on his promise to subject these guys to public televised floggings, live from Yankee Stadium.

The Fake Indian of course being an omen.

[driftdiver]

And I’ve used credit in my business. Was charging about $15k a month to American Express mostly for travel and business expenses. Then a customer billing went from $300k a month to $0k because a vendor screwed me. All of a sudden Amex was telling me not to make my house payment or feed my kids so I could pay them. Got them paid and have learned to do business without them.

[9YearLurker]

I dropped Amex decades ago and have never looked back.

[PieterCasparzen]

Another angle is if things go bad a paid off car insures you have transportation.

You're the only one, including Dave, that got that point. It's called knowing how to survive when you're really down and out (creative and pragmatic thinking comes in real handy). A car can get repo'd by the bank. If this person is on a tight budget, obviously living hand to mouth, they will not be able to pay their bills if they lose their income stream or face a large, unexpected expense. This can be from an accident where they can't work, they get fired, they get laid off, employer goes out of business, they get divorced, etc.

Everyone is brainwashed into thinking their credit line is good for an "emergency" where they face an unexpected large payment. Truth is, if they are living hand to mouth, tapping a credit line just makes a problem worse. If they simply stood there with their pockets hanging out, saying you can't get blood from a stone to the people wanting the big "emergency" payment, they would not come out of the emergency with a pile of debt. Going into debt is never the answer.

Financing a car purchase is not smart. If you buy it outright, it can never be repo'd, it's yours, lock, stock and barrel. If you buy a car when it's 3-5 years old, the worst of the depreciation has happened. First order of business, change the oil and filter, spark plugs, wires. Through monitoring the oil color you'll see how bad the wear situation is (new owners typically don't change oil much). Change it (and filter) a few times after only a few hundred miles, say a month or two using a quality conventional oil like Mobil, to flush out whatever has happened as good as you can. Then go to changing oil and filter every 2k to absolutely no more than 3k.

You can buy a car just once every 10 years if you maintain the car well; for most people that's only putting 200k to 250k miles on the car, which is not difficult with today's cars (well, the ones with a little heft to them; the tiny cars are mostly not strong enough in terms of the drive train, suspension, body/frame and interior to last that long and still be in decent shape). If you do a good job of it, you can get up into the 15-20 year range.

Make a car payment to yourself every month of $50 to $400, depending on your automobile tastes. You can invest this money to earn a small amount of interest and mature the year you want to buy the car.

This way - you're earning interest on buying a car instead of paying interest. But most people won't do this because they think of their "investments" as ONLY what is locked away in their government-regulated retirement "account". It simply kills them to have a few thousand cash just sitting there, they go nuts unless they buy something and spend it.

Either way you have a car payment, this way it's just going to be half. But young women today are freakishly brainwashed to think if they don't have a brand new car that the car will collapse from underneath them at any moment. And young men are freakishly lazy and hate the idea of changing their own oil like a squeeky girl at a tea party cuz they might get their precious baby soft hands dirty. Bottom line, the woman they moved in with does not them having the dominant role of auto mechanic, as that would give them too much power in the relationship (as in, I'm working on your car, you'll have to take mine). These women prefer a) never submitting to a husband's authority, instead having an emasculated man-boy, b) overpaying for everything (even while they are being cheap) and c) relying on "professionals" for everything and being financial slaves in our group-think society.

[cuban leaf]

I do everything via cash. I have no debt. I’ve bought bus tickets, rented a car, airline tickets, etc.

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It’s doable without a credit card, just difficult. We showed up to pick up our RESERVED rental car in LA once and all we had was a debit card. They would not let us have a car. We scrambled and found one rental car company at the airport that would let us have one. I believe some companies have changed the rules in the last five or six years to accomodate that, but I don’t know.

[cuban leaf]

Mortgage insurance is a bad bet. Buy term life insurance and never mix insurance and investments.

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I learned that from Art Williams. ;-)

[AppyPappy]

So for 6 years, he had to make a car payment. It didn’t matter if he lost his job or his income or whatever. Every month, that payment had to be made. And if the lender “lost” a payment, they would screw him like the slut he was until he could get it straightened out.

OTOH I bought a car and I don’t have to make any payments. I paid $3,000 for my car. How much did he pay for his car? If he even paid $20,000, is he $17,000 better off than me? I don’t think so.

[JCBreckenridge]

If they don’t let you reserve with cash, show them that you have it and be prepared to walk out on them.

[cuban leaf]

If he even paid $20,000, is he $17,000 better off than me? I don’t think so.

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People are not only different in income. They are also different in lifestyle and needs. A simple example: A guy that drives alone on 50 miles of highway each way to work every day needs a different car than a real estate agent working the same 15 mile radius, even if they both make the same money.

And one guy might drive a really nice car because he very much enjoys it, or uses it as a mobile office, and lives in a single wide, while another guy drives a reliable dented up beater to walmart once a week and lives in a really nice house.

Different strokes and all that...

And in this is a kernel of why I bristle when people ask why someone needs an assault rifle. They have no right to expect an answer from a question on a subject that is technically none of their business. Who are we to judge the perchasing decisions of others?

Few people have zero debt. And, knowing human nature as I do, those that do have zero debt are simply fighting different demons than those that have debt.

[cuban leaf]

So for 6 years, he had to make a car payment. It didn’t matter if he lost his job or his income or whatever. Every month, that payment had to be made. And if the lender “lost” a payment, they would screw him like the slut he was until he could get it straightened out.

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Auto payments from a checking account at the same bank from which the loan was received do not get “lost”. And if he lost his “job”, he would make the payments from petty cash. I don’t think you’ve had a lot of experience with folks who live this particular financial paradigm.

[cuban leaf]

If they don’t let you reserve with cash, show them that you have it and be prepared to walk out on them.

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In our case we were forced to. And we found someone that would take the debit card. I don’t like carrying much cash when I travel. Certainly not enough to impress someone loaning me a $25k car.

[JCBreckenridge]

Neither do I. I was talking with a friend and came to a realization just how far out I am from ‘mainstream’, in dealing with my finances. I’ve been so used to dealing with just me that it feels normal now - but, she would ask why I was paying for groceries with cash. As in a month’s worth.

Anyways, Dave has been helpful for me, and I will be going back on his plan after 2 weeks off of it. I figured out I’m happier just sticking to that plan, and now I’m working on my little ‘emergency fund’, and continuing to build it up.

[cuban leaf]

Someone gave me some perspective about why Dave said what he did. I was too hard on him. And, I still think he was off on this one, but nobody’s perfect. I’ve liked most of what has been posted here from him.

[cuban leaf]

In fact, I get the feeling that for him to treat credit, in front of his audience, as an ok thing would be like going to an AA meeting and telling them that it’s ok to have a glass of wine with your meal.

[AppyPappy]

You don’t NEED an assault rifle just like you don’t NEED a new car. These are things you want.

[AppyPappy]

Oh yes they do get lost. It happens all the time. You may use autodraft but that doesn’t keep you from overdrafting. I’m sure your friend is incredibly adept with money but he still couldn’t afford the car he bought. That’s why he had to use the bank’s money.
A payment is called a liability for a reason. There is always risk involved.

[JCBreckenridge]

When you’re working with addicts the solution is never.

[Graybeard58]

Car dealerships aren’t in business to lose money on cars. It may be “low interest” but they will find a way to screw you.

Not relevant to the point that credit card interest is generally higher than car loan interest, the couple in the article had both. They might be getting screwed on whatever they bought on their credit card too. The last car I bought was in 2012, they had a "no interest" deal or $500 "cash back", after doing the simple math, I settled for "none of the above" and paid cash.

I don't do trade ins anymore either, I either sell my old car or give it to one of the g/kids if I can't find a buyer, there's always a needy g/kid in college somewhere, I have 14 of them.

[Graybeard58]

Wife’s sister and her husband recently bought a used car and paid 27%. I was astounded, I didn’t even know it was legal to charge that much.

[Graybeard58]

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

Talking to a car salesman before buying my new car, he told me that most of the customers he sells to are "under water" on their new cars and have to buy "gap insurance". Lenders will not allow you to owe more than the car is worth, sometimes many thousands more, I avoided the problem by not having a trade in and paying cash for the lowest price I could get on the car I wanted.