- What's your best advice to parents with teens heading to college with their first credit card in hand?
- Suze: Before they get themselves in trouble, [a teen] should absolutely have an introduction to plastic. Each one of them should have either a prepaid debit card or be added to your credit card as an authorized user so you can see how they use cards. But the last thing you want ... is a teen that has a credit card in their own name.
- What cultural phenomena are contributing to today's poor spending habits for teenagers?
- Suze: Here's the thing: teenagers today are like adults were 20 years ago. They are very sophisticated in most areas of the country. They are far more educated ... because of their ability to scan the entire world via the Internet. They're 10 times more connected than their parents were even a few years ago. So it's very important that values be instilled. Children do not listen to what you say -- they do what you do.
And parents, if you don't have good behavior when it comes to money; if they see you say "no" to them, yet treat yourself to things that make absolutely no sense -- you're going shopping every day; you're going to Starbucks every day; you're going out to eat -- yet at night, they hear you fighting about money, they're going to be totally confused. So you have got to be very clear that what you do with money makes sense. That you set down the rules as they should be. So if your children are screwing up when it comes to money, you somehow had something to do with that.
- What's your signature prepaid card, The Approved Card, doing that's different or better than competitors?
- Suze: The fastest growing card in the industry today is something known as a prepaid card. There's no credit check for it, anybody can get it. The problem with the prepaid cards is that the majority of ones out there, in my opinion, have extremely high fees. I think it is a travesty to pay significant fees to use your own money.
So about two years ago, I created my own prepaid card called The Approved Card. It was recently rated two of the top five slots by Consumer Reports ... For those of you who don't have a checking account, don't have an account in a credit union, you're never going to have one, and/or you have a child that is about to go away to school ... you get up to four cards for $3/month ... And every time your child uses the card, you get a text, an email, you can block things you don't want your child to spend money on. There's no way to get your child in trouble.
- Can it help with your credit?
- Suze: I have no doubt that within a year or so from now, prepaid cards very well might generate a FICO score for you. I'm almost two years into doing this with TransUnion, and evaluating the data. Sooner than later, we will have a decision: Do prepaid cards predict future behavior? And it's looking like they do. Be on the lookout because when that happens, the entire game has changed.
- The prepaid card is sort of like having training wheels on a bicycle. Testing the waters for how you would spend money. If you do it right, you can graduate...
- Suze: You have to really think about this. We are rewarding people who get themselves in debt -- even if they're paying 18%-20% interest. As long as they pay their credit card on time, they have a good FICO score. FICO scores cannot figure out where that money is coming from. Is it coming from another credit card? Is it coming from a 401K loan? We're punishing people who are paying in cash. For people who pay on a debit card or prepaid card, they're paying cash and we're penalizing them by not giving them a FICO score. FICO scores are obsolete -- they need to be changed. The entire system has it wrong now.
- At what age is it right for someone to carry such a card in your opinion?
- Suze: There are millions and millions of people out there who are carrying prepaid cards. Prepaid cards are being used by people all over the United States. A lot of times, if you have an elderly parent like I did, you can then transfer money to that card -- they won't get ripped off. Pre-paid cards are also a wonderful way to protect yourself against identity theft. Because as soon as you use it (at least with The Approved Card), you get a text and/or an email and it always gives you your balance every time. If all of a sudden, you get a text or email that says you just charged $30 at some restaurant (and you weren't there), you can press a button and immediately close it down.
- What can parents do to get their kids more engaged in the concept of saving?
- Suze: What I would tell parents is: Can you stop this thing with allowances. Allowances are simply a fancy word for teaching a kid entitlement ... They get money simply because they were born. If you really want to teach kids about money, do something called work pay. Pay them for the work they do. ... Every one of them should have household chores that you don't have to pay for because they're living in the house, and then if you have extra things such as washing the car (whatever it may be), you would label those things -- $2 if you do X; $4 if you do Y; $10 if you do Z -- and they have to work their way up the totem pole. They can't just say I'm going to do $20 -- they have to do the one for $2 first; the one for $4; etc. They'll learn very quickly how to work for money.
- That sounds like smart advice...
- Suze: The next thing you can do to teach them to save by showing them the electricity bill for instance or the heating bill. Say "Last month, it was $150. For every dollar next month that it is cheaper, I'll give you 50 cents." All of a sudden you find kids turning off the lights; turning down the heat; not leaving the water running; whatever it is, and then they have to save it. That 50 cents has to go in a savings account.
You have to be very careful with young kids and savings. Because if they start saving money and they don't get to touch it, they'll hate savings. If a child has money in a piggy bank, they see it. They like it. They get to touch it, count it. If you then take that money and put it into a bank account for them, and they don't see it anymore, and now they want $2 and you say "that's for your future", they won't understand what "future" is and they won't save again. So you have to be careful.
The biggest mistake a parent can make with a smaller child is to take $10 from their piggy bank to pay the pizza guy 'cause you don't have money ... and not pay the child back. I had god knows how many 8-year-olds in a room, camera going, every one of them knew exactly how much mommy took from the piggy bank and never paid 'em back. They were traumatized over it.
- Would you say a financial calamity early in life can actually breed better spending habits later?
- Suze: Absolutely. You know, on 'The Suze Orman Show' (which is every Saturday night on CNBC at 9pm), we have a "Can I Afford It?" segment. One of the most popular segments is one called "Can I Afford it, Jr.?" And this is where somebody under the age of 16 calls in to see what it is they want to buy ... and I tell them if they can afford it or not. I either approve or deny them.
This one 13-year-old wanted to spend $5,000 on a purse. Now obviously, biggest mistake in this kid's life. But the fact of the matter is, she had the money because of all the money mommy gave her over the years. They [showered] her with money. The mother was horrified that I said okay to it. But she had the money. She had like $20K in a savings account. $80K for college. She was fine. There was no reason to not let her buy what she wanted. After that call, I explained to the TV audience -- hopefully the kid will understand that it's the biggest mistake she's ever made. But you have to let them make mistakes with their money. And the younger they are when they make it, the better off they'll be.
- What's the biggest mistake parents make in the process of splitting up?
- Suze: The biggest mistake comes after the divorce -- especially for single mothers. More so than fathers. The single mother who has the child (through custody) feels that because the father is no longer present that they have got to give that child every possible thing, and sacrifice everything.
The biggest mistake you make for yourself as well as the child is to overcompensate financially speaking -- taking care of that child without taking care of yourself. The greatest gift you can give a child is to understand that you have to take care of yourself first before you can take care of someone else.
- Holidays are big business in our country. "Back to School" has almost become an event for the sake of driving commerce. What advice could you give parents as to how they go about spending every year for their kids in preparation for school?
- Suze: What's fascinating is that you watch your 13-year-old and you can't believe how much he wants to buy. I need parents to think back to when your child was in kindergarten or 1st grade -- they never went shopping. You took 'em shopping and you always wanted them to have this cute little backpack and you put them in all these things that were so cute. You started this in them.
As they get older, it's going to be very difficult when their friends are all buying all these things and maybe you don't have the money to do so. What do you do? The truth of the matter is, whether you have the money to do so or whether you don't, you should set an amount of money that they will have for the entire year to spend on clothes.
The other thing is you should give it to them in cash. Stop going into all these stores and putting things on credit cards because they're not seeing how much money is going through your hands. They're not getting it. Give them the money to go with, and if they lose it, it's lost. Not your problem. They lost money. They'll never lose money again. So if their budget is $200, give them $200 in cash. And if you don't have $200 in cash, then you don't have $200 for them to go out and buy it.
- What age is this appropriate?
- Suze: Anywhere from 13 and on. They have the ability to handle money at that time. You can go with them, but they have to hold the cash in their hands. If they see all these things that they want, they should put it down and come back the next day (or two days later) -- because they probably won't want it two days later. It's an interesting exercise to not being able to get something immediately. The other thing is you've got to teach your children the difference between needs and wants. The child has got to start asking: Is this a need, or is this a want?
- Do you think finance should be a mandatory class in high school or college, like Spanish or English?
- Suze: It should be mandatory that personal finance is taught, number one. Number two, it should also be mandatory for college that you cannot take out a student loan unless you can pass an exam about student loans. Pass an exam that says you know what it is going to cost you when you graduate.
This woman we were talking to today has $250K of student loans and her husband has $300K of student loans (they're both doctors). They have almost $600K in student loans! They're monthly payment is going to be about $6K-$7K a month. One of them is a vet making about $70K a year ... When you talk to them, they say they had no idea. The rule of thumb is you do not take out more student loans than what your first year salary will be.
- That's assuming you get a job out of college. I read that the federal student loan rate dropped from 6.8% to 3.86%. Is that a green-light for parents to co-sign a student loan?
- Suze: No, it's not. Because at the same time that it dropped, if you look at it, each year that loan will be fixed. But if they have to take out a loan the next year -- it's all tied to the 10-year treasury and blah, blah, blah, blah. The maximums now are far beyond what they were when it was just at the 6.8% rate. So in the future, when interest rates go up, our future students are going to be hit with this. I think it's a travesty what they just did with student loans. We would've been far better off just leaving them all like they were.
- Is the ease of online banking posing a problem with regards to financial responsibility in your opinion?
- Suze: For a while it did. I do think however that if you set your accounts up correctly, it can be a tremendous aid. I think you should absolutely only have a card that does text you or email you every time you use it. I think every day you should get a text with the balance on your account, which is what The Approved Card will do for you as well. I think you should absolutely be in touch with your money all the time in terms of what's going on. So if you use online banking correctly, it can be an aid. If you don't, then you probably wouldn't have been good with the traditional banking methods anyway.
- Does your prepaid card have settings that allow parents to control whether their kids buy things online vs. offline?
- Suze: What's great about it is when you start to see your kids doing something, the max they can have on it is like $500 a month. They're not going to be able to get themselves into a whole lot of trouble. But you want to see what they do with their money, without you telling them what to do -- so you can then start to educate them on it. The Approved Card, by the way, also comes with a savings account. So besides what you can buy every day, there's a separate account on it for free where you can start to save money as well.
- What's your lesson for parents teaching their kids specifically about buying things online?
- Suze: Kids can't buy things online if they don't have the money to buy things online. And if in fact they are buying a lot of things online, and it's on your credit card, and you're allowing that to happen -- then really, who's to blame? There's always going to be a way for kids to spend money, but kids have to understand that they can't spend money they don't have, which is why you want to think twice about kids ever having a credit card.
Interview With Suze Orman, Personal Finance Expert and Host of CNBC's 'The Suze Orman Show':
Get more of Suze's free financial advice on 'The Suze Orman Show' (Saturdays on CNBC at 9pm). To learn more about The Approved Card, visit www.TheApprovedCard.com.
You can follow Suze Orman on Twitter @SuzeOrmanShow.
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