Dave Ramsey: 5 Sneaky Types of Debt
Written by
Stephanie Mickelson
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One of personal finance expert Dave Ramsey’s key phrases, “debt is dumb,” leaves little room for interpretation. Other than a mortgage, the only debt that Ramsey isn’t actively against, no other debt is worth having. But even though Ramsey’s advice allows for a mortgage, it’s still debt along with other types of sneaky debt, including car payments, student loans, credit card rewards, and interest-free deals.
The idea of debt is simple. When you borrow money for something, you are in debt. You owe the lender the money you borrowed and will typically owe interest, ultimately making the total amount you repay more than what you initially borrowed.
These five sneaky types of debt are often thought to be exceptions to the rule, but in reality, debt is debt. And debt, according to Ramsey, should be avoided whenever possible.
1. A Mortgage
While Ramsey makes allowances for taking out a mortgage to buy a home, this allowance comes with some guidelines. Because a mortgage is a debt, it also comes with an interest rate, which can significantly raise the final amount you’ll pay on your home. To mitigate some of these costs, Ramsey recommends putting a 20% down payment on a 15-year mortgage with monthly payments that aren’t more than 25% of your take-home pay.
Even though a mortgage is often considered “good debt” because a home is an appreciating asset, it’s still debt and carries an inherent risk in the event that you can’t make your monthly payments. It will also continue to accrue interest, so the faster you pay it off, the more money you’ll have in your pocket for other things.
2. A Car Payment — or Two
Car payments, like a mortgage, are often thought to be unavoidable. Who has $60,000 cash to pay for a vehicle? Unfortunately, cars depreciate the moment they drive off the lot. Their value continues to drop, falling 60% after five years. Avoiding car payments by buying a used car with cash can mean less risk in the form of debt. And when it’s time to sell it, you likely won’t lose as much money as you would if you had bought a brand-new car.
3. A Student Loan
College is expensive. But it can open career doors that would otherwise be closed. That’s why student loan debt can be sneaky — it’s used for a higher purpose because obtaining an education and a degree can benefit you later on. But according to Ramsey, “student loans hurt a lot more than you might think.”
In the third quarter of 2023, student loan debt rose to $1.6 trillion. The average four-year college tuition costs a total of just over $45,000 for in-state students and nearly $117,000 for out-of-state students, according to CollegeBoard’s most recent Trends in College Pricing data. Carrying this much debt as you try to get a career off the ground and pay for living expenses can be debilitating and should be avoided whenever possible.
4. Credit Card Rewards
It’s easy to think that you’re getting one over on the credit card companies as you rack up cash-back rewards and travel points. But the reality is that consumers spend more when they use a card versus cash. In 2016, the Federal Reserve Bank of Boston released its Diary of Consumer Payment Choice, which showed that the average cash transaction was $22 versus a credit card transaction that averaged $57. So, without even realizing it, you may be spending more than you normally would to use a credit card in the name of getting their rewards.
5. Interest-Free Loans
Is debt without interest still debt? Yes. Interest-free loans come with caveats, namely that the loan needs to be paid back within a certain time frame or you will begin accruing interest. Companies know that the chances the debt will be repaid within the time limit are slim — that’s why they offer this type of loan. So, even though this doesn’t seem like real debt, the truth is that this sneaky type of debt can hang around longer than you expect if you come up against unexpected expenses and have to pay interest anyway.
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