Credit Cards Are Evil. Really??

First, let me say that I really appreciate Dave Ramsey – I believe he has the heart of a teacher and wants to help people be financially successful. Secondly, I firmly believe that one of the biggest contributors to financial failure, for many people, is credit card debt. I’m adamantly opposed to it myself, but is the best solution to follow his advice of not having credit cards? He and I disagree on the answer to this question.

If you avoid getting any credit cards, it will remove the temptation of over-spending and I get that. However, responsibility is the real issue here. Not spending more than you can pay off at the end of each month and not overspending because "there is less emotional pain when paying with a card", should always be our practice. Now, if you completely buy in to avoiding all debt and not having any credit cards, where does that leave you? It may keep you out of debt, which I am a HUGE fan of, but it is also going to keep you from having a credit score.

Does that mean you can’t get a mortgage loan? No. Does that mean it is going to make it much more difficult? Absolutely. There are options where non-traditional credit (things that don’t show up on your credit report like rent, utility payments, insurance etc.) can be provided to support a loan. Many times options like FHA and THDA work just fine, but what about conventional loans?

I worked with a client this week that has the ability to put 20% down, which will enable her to avoid mortgage insurance. In her case, a conventional loan is the best option. She has a great job, low debt to income ratios and plenty of cash. She has lived a very disciplined life and has no debt – and no credit. Period. For several reasons (interest rates being tied to credit scores as the primary), it is going to be incredibly difficult to get her the financing she deserves. We’ll find options for her, but it will require additional documentation on her part and will likely be less favorable pricing. There is a better way.

For clients like this, who live frugally and are committed to saving, what is the danger to owning a couple of credit cards? In my opinion, when done strategically, there isn’t any. I have a daughter in college that has been taught from the time she had a concept of money, that she better never carry a balance on a credit card. When she graduates, she will have at least two cards that will have been opened for 24+ months. They will have no annual fee and have a maximum limit of $500. She can’t get in trouble this way and she will have a stellar credit rating when she graduates. So let's be responsible and take advantage of building good credit to our advantage.

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The Week Ahead
The biggest economic release this week likely will be the Fed Minutes from the April 30 FOMC Meeting which will come out on Wednesday. These detailed Minutes provide additional insight into the debate between Fed officials. Investors also will be watching the housing data. Existing Home Sales will be released on Thursday and New Home Sales will come out on Friday. Mortgage markets will close early on Friday in observance of Memorial Day.

The Week That Was
The two biggest reports on economic growth released last week both fell short of the forecasts, which was favorable for mortgage rates. In addition, expectations increased for a bond purchase program by the European Central Bank (ECB), which also was positive for mortgage rates. As a result, mortgage rates ended the week near the lowest levels of the year.

In recent weeks, the economic data generally has shown a solid rebound from the weather-related slowdown seen this winter. Last week's data for April activity caused investors to grow a little more cautious about the outlook for the rest of the year, however. While the forecast was for a third straight month of large gains, April Retail Sales rose just slightly from March. Retail Sales account for roughly one third of consumer spending, so a big miss is significant. Another important indicator of economic activity, Industrial Production, showed a sharp decline, surprising most economists.

A bright spot in last week's economic data came from the housing sector on Friday, and the better results offset some of the improvement seen in mortgage rates earlier in the week. April Housing Starts increased 13% from March, far exceeding the consensus forecast, and they were 26% higher than one year ago. April Building Permits rose 8% from March to the highest level since June 2008. Most of the increase came from multi-family units, however. Excluding multi-family units, Housing Starts showed much more modest gains.