Credit Cards and Student Loans

Reader Question: My daughter is in her first year of college. Recently, her math instructor walked students through the process of getting a credit card and building credit. We’ve always followed your plan and taught her to do the same. When she asked the instructor if no credit score was as good as a high credit score, the instructor said no. He told the class the only way to buy a home without a high credit rating is by having a huge amount of assets or savings. I think I know your answer, but how do I explain this to an 18-year-old?

Well, the first thing you explain is that college instructors — even tenured college professors — can be absolutely wrong sometimes.

A few years ago my daughter took a personal finance class in college, and on the first day the instructor went on a rant saying Dave Ramsey is stupid. He didn’t know I was her dad, but she went through the entire class and never said a word. When she called home and asked what she should do, we told her to take the class and give him the answers he wants on the tests. We reminded her that she’s just taking a class, and that doesn’t mean she has to form her life opinions around what that guy thinks.

Sit down with your daughter and gently explain in this instance her instructor doesn’t have a clue what he’s talking about. Explain to her you can get a home loan even if you have no credit score. People do it all the time. There are places like Churchill Mortgage that would be happy to give her an example of this process. It’s called manual underwriting. All you have to do is make a reasonable down payment, have two years at the same job, and provide two years of tax returns.

Reader Question: I’m 38 years old, and I’ve got $12,000 in student loans still hanging over my head. It’s the only debt I have. I make $30,000 a year, and I’ve managed to save $12,000, but I’m also driving a junky, old car that will have to be replaced soon. Should I split the money I’ve saved and buy a $6,000 car while paying off $6,000 of the student loan?

If I’m in your shoes, I want that student loan out of my life as quickly as possible. At the same time, I don’t want you living life without some money in the bank.

If you’ve followed me for very long, you know I teach the Baby Steps when it comes to getting out of debt and saving money. Baby Step 1 is to save a beginner emergency fund of $1,000. Baby Step 2 is to pay off all debt, except for your home, using the debt snowball method. The third Baby Step is to build a fully funded emergency fund of three to six months of expenses.

You don’t have quite enough on hand for your idea and to have something left over. I recommend paying off $11,000 of the school loan now and then finishing it up as you go. It won’t take much more time. Limp along in the beater for a little while longer and then, when you have no student loan debt, finish your emergency fund and start a car fund.

I talk to a lot of people your age who still have student loan debt. But you have the opportunity to punch its lights out in a hurry.

Dave Ramsey

Dave is the author of The New York Times best-selling book Financial Peace. He is also the host of the nationally syndicated The Dave Ramsey Show, and is a regular guest on television. All of his financial counseling is based on biblical truths. You can hear Dave from 9 a.m. to 11 a.m., weekdays, on WLWI 1440 AM or online at www.daveramsey.com. Send your questions to askdave@daveramsey.com. He resides with his wife Sharon and their three children, Denise, Rachel, and Daniel, in Nashville, Tennessee.

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