Dave Ramsey Is Right About Avoiding These 3 Kinds of Debt

Ramsey is spot-on about the dangers of these types of borrowing.

Personal finance expert Dave Ramsey is widely known for being against almost all types of borrowing. Ramsey not only advises not using credit cards, but he also believes you shouldn't take out a mortgage if you can avoid it. 

Ramsey's position on credit cards and mortgages is short-sighted, because cards can help you earn rewards and build credit, and can be a great tool if you use them responsibly. Mortgages are affordable loans, and it makes sense to take one out rather than tying up all your money in your house.

But there are certain other kinds of debts that he suggests you should steer clear of -- and in advising against these types of borrowing, the finance guru is spot-on. Here are the three types of debt that Ramsey rightly suggests that you should avoid. 

1. Store cards 

Ramsey has repeatedly advised steering clear of store credit cards, both on his show and on his blog. Store credit cards may seem attractive because you are generally offered a discount when you open the card. 

Unfortunately, the interest rate on these cards tends to be really high -- even compared to standard credit cards. And the rewards you earn on store cards can be more difficult to use than standard credit card rewards and often trap you into spending more money in order to cash in any cardholder bonuses. 

Since store credit cards can be more expensive than other cards with worse rewards, Ramsey is right that they should be avoided. Instead, stick with paying cash or look for a good general purpose rewards card that has a more competitive rate and a better rewards program. 

2. Installment plans 

Installment plans, or buy-now pay-later plans, are quite common. While brick-and-mortar stores have long offered them, digital installment loans have also become even more popular in recent years.  

These plans typically tout the fact you can pay 0% interest when you make use of them. But as Ramsey's blog warns, there are hoops you have to jump through in order to actually avoid interest charges and fees. Missing a payment, paying late, or not paying off the loan exactly on schedule could lead to fees and back interest charges.

Installment plans also make it possible to buy things you can't really afford, and they require you to commit future income to payments which can stretch your budget later on. For all of these reasons, including the risks of high costs if things go wrong, Ramsey is right to advise opting out.

Instead of using an installment plan, aim to save up for items before purchasing. Or if you can't do that, consider a credit card offering a 0% APR for new customers for a certain period of time such as 12 months. These cards usually don't have as much fine print, and may give you longer to pay off your loan without incurring interest charges.

3. Car leases

Ramsey is adamantly against leasing a vehicle, as he's made clear on his show and website. Car leases are an extremely expensive way to gain access to a vehicle, and as Ramsey said on Facebook, they are a "rip-off" because you end up getting charged a high effective interest rate that isn't disclosed upfront since leases aren't considered debt. 

Ramsey is right that leases can be problematic as you often get hit with high fees for going over the mileage limit or wear and tear on the vehicle. You'll also end up making payments for years with nothing to show for it in the end, unless you buy out the lease -- which can be very expensive.

Paying cash for a car or even financing it with a low interest loan that has a short payoff period can be a far better approach in the long run. 

While you may not want to listen to Ramsey about mortgages or credit cards, there are plenty of reasons to heed his advice on car leases, store cards, and installment cards. If you don't want to make your financial life harder, just say no to all three.