Dave Ramsey has slandered the credit card industry in much the same way he slanders insurance — and a close look at his math suggests why. (AP Photo)

Last summer, an insurance guy from Ohio —who closely resembled Urban Meyer — sat down across from me in a hotel hot tub. He recognized me as “the Ramsey guy.” For the next fifteen minutes, as I tried to relax and have a drink, he went on about how I didn’t understand debt and what a lifesaver Dave Ramsey had been for him and his wife. I finally replied, “Good for you, buddy. I’m going to go get another drink and put it on my room, and that’ll be charged to my credit card.” You should have seen his face.  

Until now, I have focused this monthly column on debunking Dave’s misunderstanding of insurance products and investments in general. Today, my message is simpler, however. Today I’ll show you the wolf who wears the sheep’s clothing.

What Dave says about identity theft

In the September 9, 2015 episode of The Dave Ramsey Show, Dave discusses the subject of credit cards. He notes that seven out of 10 times credit card companies don’t thoroughly check your credit. They only spot check, he says — and, in fact, they only do this about 30 percent of the time. The show concluded with Dave urging everyone listening to call Zander Insurance and find out more about the identify theft protection plans they offer.  

To be honest, I forgot about this until I came across the following excerpts from Dave’s weekly print column, “Dave Says.” On August 12, 2014, Dave was asked if freezing your credit is a good tactic to protect against identity theft. 

First he says:

“If Joe Crook signs an application with your name and address, and the credit card company issues the card without checking — they blind-issue cards about seven out of 10 times — then the card will be issued to the thief.”

He goes on to say:

“I’d also recommend having a good identity theft protection program in place. I have it on myself and all my team members at the office. If you don’t have this, and someone gets a card in your name, the credit card company will demand that you pay the bill. You can insist it’s not you, but that won’t do much good. Then, you’ll have to go through the hassle of filling out affidavits and police reports.

You may get out of paying for it in the end, but you’ll still have to spend dozens, if not hundreds, of hours dealing with the credit card company trying to get the whole mess straightened out.”

Moreover, in a November 2012 appearance on Fox and Friends, Dave attacks credit card companies more directly, stating that they “invite identity theft into their industry by their lack of underwriting.”

Researching the issue

My staff has made dozens of phone calls to Visa, Discover and American Express. We’ve been told by almost every local issuer that credit is checked every time an application is submitted. Only Visa corporate, by way of a customer service clerk, said that sometimes credit history is not checked if the applicant holds existing accounts.

A Google search indicates there are some credit cards that explicitly state they will not check your credit. The only ones I could find, without actually applying for one, were prepaid debit/credit cards.

Why would Dave Ramsey spout inaccurate facts about credit card issuers? As with taxes, investments and life insurance, it may be due to incompetence rather than intent to deceive. But for someone who claims to be America’s favorite financial resource, I’m not sure that is less damning.   

The real odds of identity theft

Zander Insurance Group, one of Dave Ramsey’s oldest endorsements, offers an identity theft protection plan that runs between $75 per year for an individual and $145 per year for a family. As noted above, Dave is not shy about promoting this fact to his loyal weekly listeners and readers, which number 11.5 million. What if Zander, through Dave’s endorsement, can pick up a 3 percent response rate — that’s higher than normal, but these are loyal Dave fans — and 80 percent of the responses turn into proud new owners of Zander identity theft insurance?

Time to have some fun.

The odds of identity theft is about seven percent for people over 16 years of age. There are a few points we must consider:

  1. Those who are willing to buy insurance to protect their identity are likely more conscious of sensitive personal data and less likely to have their identity stolen.
  2. In 2014, only 14% of identity theft victims had any financial liability.
  3. Half of the 14% above were responsible for less than $100.
  4. Most people spent less than one day fixing the problem.
  5. 10% spent more than 1 month trying to fix the issue.

For the purposes of this column, I’d like to focus on Zander’s family plan because I can imagine the easy upsell here. You call in to Zander, you talk to the nice insurance person, and they suggest you purchase a family plan. You ask if the group protection plan is really necessary and hear, “Dave bought insurance for his entire team.” Being the faithful Ramsonite you are, you think, “If Dave covers everyone, so should I!”

The profit involved

Now, let’s look more closely at the numbers.

Our potential customer base is the same as Dave’s audience base, 11.5 million. Multiply that by a 3 percent response rate, and you get 345,000 leads. If the wonderful Zander people can convert 80 percent of those leads into customers, we’re looking at 276,000 new policies. Again, I realize this sounds high, but these are loyal Ramsey followers calling one of Dave’s oldest endorsed companies.

Now, let’s assume 70 percent of the new policyholders choose the family plan. That’s an average annual revenue of $123.50 per policy ($145 x 70% + $75 x 30%). Multiply $123.75 by 276,000 policies and you get a grand total of:

$34,086,000 OR Thirty Four Million Eighty Six Thousand and 00/100 cents.

This is clearly not all profit, since there will be some claims. Let’s rely on the data above, and suppose that seven percent of the new Zander policyholders have their identity stolen. This brings our victim count to 19,320.

Remember, just 14 percent will be liable for any costs. In this case, 2,704 policyholders will be held liable. Among them, half will have costs less than $100. To be generous, let’s assume 1,352 victims pay the full $100 — or, in other words, Zander has a $135,200 liability.

This leaves us with another 1,352 victims. While some reports show the cost per theft is close to $10,000, this isn’t the amount the victim is liable for. I’m going to assume a $1,000 liability per person for Zander. This is another $1,352,000, which brings the claims total to $1,487,200. 

Of the 19,320 victims, 90 percent are cleared up in less than one day. Let’s say this takes one Zander employee 3 hours of talk time; at a $15 per hour wage for the Zander employee, that’s $782,460.

Now for the 10 percent who got it handed to them. If a Zander employee spends half of every work day for six weeks resolving the issue, we’re looking at another $3,477,600 of costs. The total liabilities directly related to identity theft amount to $5,747,260. 

This leaves Zander with a very hefty profit.

$34,086,000 – $5,747,260 = $28,338,740

The impact

What’s a $28M per year endorsement worth? Is it worth 1 percent ($280k) or is it worth 10 percent ($2.8M)? What would someone be willing to say against the evil credit card empire when it translates into such substantial revenue? ‎Is it easier to justify a little white lie if it only affects an industry that is known for onerous interest rates often applied to the people who can least afford it?

But, of course, these falsehoods are not just hurting the credit card industry. If only 14 percent of identity theft victims are liable and, among those, half are liable for less than $100 and the other half are only liable for, say, $1,000, then the p(x) = $11. Use common sense here. Even in the worst case scenario, the victim’s premiums will match $1,000 liability in less than 7 years. If we use Ramsey math (12 percent compounding growth), then this coverage will cost the average listener almost $150,000 across 40 years. 

Why would the beloved Mr. Dave Ramsey, the purveyor of good old-fashioned American values, suggest that everyone in his audience purchase an insurance policy in the face of such mild financial liability? Why does the wolf dress in the sheep’s clothes? I can’t say with Dave. But the wolf, well … it’s easier to fill his belly that way.