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As much good as he does, Dave Ramsey drives me nuts with his views on debt. Dave Ramsey, as he readily admits, did some really stupid things with debt. Leveraged to the hilt on bad real estate deals, he went bust in a way most of us could never image. Even as a real estate investor, my leverage and borrowing comes no where near the toxic level Dave Ramsey went to. Why? Because Dave Ramsey’s personality is one of extremes. Much like an alcoholic, he could not control his use of debt. He got one taste of that leverage, and he was borrowing before noon ever day.

Dave Ramsey is a Recovering Debtaholic

Now he is a recovering debtaholic. Like a recovering alcoholic, he should never borrow again. Why? He just can’t handle it. Put Dave Ramsey and debt together, and something really ugly develops. Ok, fine. But why should that apply to all of us? It’s as if a recovering alcoholic were telling the rest of the world never to have a glass of wine. In other words, what works and doesn’t work for Dave Ramsey may not apply to everybody else. Of course, there are those who, like Dave, can’t control debt and should avoid it just like he does. But debt, if used wisely, can greatly improve one’s finances, can increase one’s financial freedom and can greatly improve your balance sheet.

Own versus Lease–there’s really no difference

And being debt-free does not automatically mean you’ve achieved financial freedom. For example, in the world of accounting, there are some intricate rules relating to how a company should account for a lease. Part of the reason for these rules is to prevent a company from appearing to improve there balance sheet when in reality they haven’t. Let me explain. Suppose a company owns a building and has a $1 million mortgage on the property. The mortgage of course is reported as a liability on the company’s balance sheet. If it wanted to get that mortgage off its balance sheet, but still keep the building, it could sell the property and then lease it back from the buyer under a long-term lease. Is the company any better off? No, its just changed the legal form of its ownership of the building. It’s still obligated to pay for the building each month, but now the payment is called rent rather than a mortgage payment.

We can do the same thing renting a house or leasing a car. You may not have debt, but you do have financial obligations that require monthly payments. And you’ll never own outright the thing your paying for each month.

The Real Deal on Debt

So here’s the deal–being debt free is not the holy grail of financial freedom. My wife and I could be debt free quite easily. We could sell our house, pay off all our debt, and have some money left over. I guess we’d then rent a house or apartment, and I would continue to go to work everyday. Would we be more financial free? Nope. I suppose we could move to a less expensive area and perhaps even pay cash for a home. Would we be any more content in life? Nope. In fact, all we’d end up doing is uprooting our family and moving away from a place we love.

Now the point here is not to run out and start borrowing. But I would suggest considering the following guidelines when it comes to borrowing money:

1. Avoid borrowing to buy something that’s not a long-term hard asset: That means don’t borrow to go on vacation, or go out to fancy restaurants, or to line your closet with expensive clothes. One of the reasons we are financial free even though we have debt is that we have tangible assets behind the debt (our house) that we could sell if we wanted to and be debt free. Once you take a vacation, you can’t sell it to pay off the debt.
2. Keep total debt payments below 30% of your gross income: I know that for many this will be very difficult, particularly if you live in an expensive area. But I’ve found that if monthly debt payments exceed 30% of your gross income, life gets very uncomfortable. And I should add that as you get older, this percentage should be going down. It should go down because your income should be going up, and it should also go down as you pay off debt. If you’ve read my articles about how Lending Club sets interest rates, you know that you must have a debt-to-income ratio of 30% or less to borrow from Lending Club. That ratio, however, doesn’t include your mortgage or rent payments. Here, I think it should. The goal is to keep all debt payments, including housing, below 30%.
3. Borrow wisely: We should all know by now the dangers of variable rate mortgages. Mortgages should be on 15 or 30 year fixed rate loans. Take advantage of 0% credit card offers when it makes sense to do so. You can check out some 0% balance transfer credit card offers and my 10 Commandments on using 0% credit cards.
4. Don’t spend today what you’ll earn tomorrow: This really ties into the first guideline above. But the point is to control your spending, and don’t let easy access to a loan take your spending out of control. There are plenty of free online budgeting tools you can use that will help you track and control your spending. Use whatever works best for you.

Dave Ramsey is entertaining, and I agree with a lot of what he preaches. And if you choose to avoid debt like he does, I certainly won’t tell you that’s a bad decision. But I also believe that responsible borrowing can improve your finances with modest risk. So what do you think–is Dave Ramsey’s approach to debt the right approach for everybody?

I have saved thousands of dollars in interest charges using 0% balance transfer credit cards. In fact, we have over $100,000 in available credit on our credit cards from taking advantage of 0% interest rate offers (by the way, here are some balance transfer credit card offers). Because we’ve saved so much money with them, I thought I would share with you our 10 Commandments when it comes to using 0% balance transfer credit cards.

1. Watch the balance transfer fees. Most 0% balance transfer credit cards charge a fee for the balance transfer, although you can find some that don’t. Make sure you read the fine print so that you know what fees you’ll be charged. I’ve seen some balance transfer offers that charge such a high fee that it turns a 0% offer into something more like six or eight percent.

2. Never use a 0% balance transfer offer to increase the total amount of your debt.  I’ve seen some folks transfer debt to a 0% credit card, only to charge up additional debt on their other credit cards.

3. Have a plan for when the 0% introductory rate expires.  Did you ever wonder why credit card companies are willing to offer 0% interest for sometimes as long as a year?  The reason is that they know many people will leave the balance on the credit card after the introductory rate expires.  Therefore, it is critical that you know what you’ll do with the remaining balance when introductory rate expires.  For us, it usually means transferring the balance back to our home equity line of credit that charges a very reasonable and tax-deductible rate. If you plan to leave the balance on the card, check out commandment number 4.

4. Always know the interest rate you’ll be charged once the 0% introductory rate expires.  If you plan to leave the remaining balance on the card after the introductory rate expires, you should know what the adjusted rate will be before transferring the balance in the first place.  We currently have 0% introductory rate credit cards that will charge about 7.5% when the introductory rate expires.  While we don’t plan to leave the balance on the cards at that time, 7.5% interest would not be the end of the world.

5. Don’t use 0% offers to overspend.  When we recently purchased furniture for our living room, a furniture company offered 0% interest for 12 months.  We turned down the offer.  I knew that with a 0% offer, we would be inclined to purchase more furniture than we needed. So instead, we paid cash. This goes to another principle that we follow–never borrower to buy consumer goods–but that’s for another article. 

6. Shop around for the best 0% balance transfer option.  Not all 0% credit card offers are alike.  Some charge different balance transfer fees.  And for others, the introductory 0% rate lasts for varying periods of time.  I’ve seen some lasts for as short as three months, while others have lasted for 15 months.

7. Understand the difference between a 0% interest rate on balance transfers and on purchases.  Some credit card offer a 0% introductory rate on purchases only, not balance transfers.  Other cards offer a 0% rate on both balance transfers and purchases.  As you are shopping for the best 0% credit card for your needs, make sure you understand this difference.

8. Understand how credit card companies apply the payments you make.  Credit card companies will apply your payments to the portion of your debt that is subject to the lowest interest rate.  For example, if you have a balance transfer of 0% and purchases at 18%, your payments will first be applied to the balance subject to the 0% balance transfer rate.  That is why we keep our 0% balance transfer cards separate from credit cards we use on a monthly basis. In fact, I have cut up our 0% balance transfer cards to make sure we don’t accidentally use them for a purchase.

9. Look for cards that also offer rewards.  Several credit cards with 0% introductory rates also offer excellent rewards packages.  Depending on whether you travel a lot or want cash back from purchases, you’ll find credit cards that offer a vast array of rewards.  But you need to keep in mind that for many of these cards, the balance transfers that you make will not qualify for the reward.

10. Always remember that even at 0% interest, it’s still debt.  While I have taken advantage of 0% credit cards and saved a lot of money as a result, it doesn’t change the fact that we still have debt.  Credit cards can be an awfully tempting and destructive privilege, so use even 0% credit cards with care.

Over the past week or so I have spent a fair amount of time researching available 0% balance transfer credit card offers. Most offers typically include a 0% interest rate introductory offer for six to 12 months. I’ve created a 0% balance transfer credit card page listing each of these credit cards, several of which I am using and taking advantage of today.