Interview by Caroline Hanamirian, Princeton University
**Business Today:** As college students, we often receive mixed signals about opening up a credit card from our parents and from credit card companies. When and how can a college student start establishing a good line of credit?
**Suze Orman:** What’s funny is that it would be great if, by the time you get to college, you actually already had a background in what credit cards are, how they really work, what they want you to do, what they don’t want you to do, and the truthful role that they play in your future finances. It’s one thing to establish a FICO Score, which everybody needs. It’s another thing, however, to emerge from college with a bad FICO Score, which most students do today. Because students don’t understand that when they get one of these credit cards, if they go over their credit limit, if they are not on-time in paying their credit card bills, that in fact that’s reported to the credit bureau…One of the easiest ways to establish credit, believe it or not, is when you are younger, when you are 12, 13, 14, if your parents have good FICO scores, if your parents are responsible, if your parents simply added you on – at that time – to all of their cards as an authorized user, they don’t have to give you a card, they don’t have to let you know that they did that, then their FICO scores would become your FICO scores. You would establish credit based on their history.
**BT:** What is a FICO Score?
**SO:** A FICO Score would be your equivalent to an SAT score. A FICO Score is a three-digit number that determines the interest rate that you will pay on credit cards, car loans and home mortgages. It not only determines the interest rates that you pay, it determines if an employer will hire you, a landlord will rent to you, if a cell phone company will sign you up for service and, in most states, what your car insurance premium happens to be. The higher your FICO Score, the lower your interest rates and the more of a chance that someone will hire you, rent to you, give you a low car insurance premium and so on and so forth. The lower your FICO Score, the higher your interest rates and the less of a chance you’re going to be able to rent an apartment and get a job. It’s what matters. FICO Scores run from 300 all the way up to 850. You not only have one FICO Score, you have three. You have one for every credit reporting bureau out there. And the three credit reporting bureaus are Equifax, Experian, and TransUnion. Every thing that you do in life when it comes to money and paying a bill is reported to one of those three credit unions. Your utility company may report to one of them, your landlord or your mortgage company, if you ever get a home, will report to another, your car payment when you buy a car will report to one of them, your student loan companies reports to one of them. Everything that you do reports to one of those three credit reporting bureaus. When you go to apply for credit, a credit card, a car loan, a home loan, when you go to apply for a job, renting an apartment, your insurance on your car, they pull up what’s known as your FICO Score. And at a glance, what that FICO Score is determines what happens to you. The higher your FICO Score, the better off you are. Anything under 500, you are in serious trouble. You are FICO-ed. There’s no other way to say it. From 500 hundred up is what they’re looking for, but really today, because of the credit crisis that’s out there, anything below 760 isn’t good.
**BT:** What determines the FICO score?
**SO:** 30-35% of your FICO score is made up of “Do you pay your bills on time?”. The problem with college students is that they go to the college the very first day, and the university allows credit card dealers on your campuses to give you credit cards. That should be outlawed. Any and every university that does that absolutely should be ashamed of themselves. How do you give a student a credit card if the student does not have the ability to pay it back? The credit card companies are wishing, hoping, and praying – in my opinion – that you get yourself into financial trouble. Because normally when a student gets themselves into financial trouble, guess who saves the children’s credit? The parents. It doesn’t make any sense that when you go to college and you don’t have an income (some kids do, but some kids don’t - they give it to anybody regardless of income) that you’re charging things. You don’t have the ability to pay it back because you don’t have the money to pay it back. Why would they do that? They do that in the hopes that your parents will step up to the plate and pay off your credit card debt for you after it has accumulated, after you have been paying interest rates anywhere from 9-30% on that credit card. What you have to be very aware of today is that, throughout the United States of America, there is something known as the Debtor’s Revolt going on. People who have never been late on their credit card payments, people who have always paid on time, never gone over their credit limits, have been customers of these banks – Bank of America, Chase, American Express – you get it, any single bank out there, as the credit crunch has worsened (over the past year or so), what happens is these credit cards have been increasing interest rates on people from 12-30%, have been increasing the minimum payments due, and have been shutting down the credit cards once they’ve been paid off. So the greatest advice that I could give you today is: if you get a credit card, you should never, ever use it unless you know you can pay it off in full every single month after you have charged…So, credit is something that is essential, a FICO score is essential; however, I find it fascinating that there are no universities that I know of that teach a useful, personal finance course. Sure, they’ll teach you about economics and the economy and this and that – you’re going to school, do you have a personal finance course, there? –---- “No, I do not.” ----What does that tell you? They’re allowing credit cards to come on your campuses, but they don’t even have the ethics to be able to also teach a course that goes with it? Hey! You want to sign up for a credit card? But only get that credit card after you have gotten an A on your personal finance course. But no, that’s not what the universities and the colleges do. Now, why do they allow credit card on your campuses? Because they, I am sure, get a revenue share of what goes on with those credit cards. They’re not doing it out of the goodness of their hearts.
**BT:** Relating to the suggestion of a personal finance course, do you think that, when it comes to managing personal finance, an economics major has an advantage over a comparative literature major? How much of managing your money requires financial savvy and how much is just about common sense?
**SO:** I think that an economics major who studies not only from the perspective of the economy of the world, so to speak, but also the economy of personal finance, may very well have an advantage over a comparative literature major. Especially if that comparative literature major has never gotten involved with personal finance, does not understand why paying bills on time matters, what a FICO score is, why you need credit cards, why you need to stay out of credit card debt – even though you need a credit card – or how to balance your checking accounts. Banks make the majority of their money on fees from going over your budget. People write a check for money that they don’t have in their accounts. They write checks and they have overdraft protection and they think, “Oh, how cool, the bank is paying for me.” But they don’t understand that, in that one little stroke of a pen, they’re paying a $39 late fee, an over-the-limit fee, and they’re paying a seriously high interest rate on the money that the bank fronted for you. So I know people who have five, six hundred dollars-a-month of late fees. I do not and I will never understand why universities – as well as high schools– do not make it mandatory that there is a personal finance course that has got to be passed with flying colors before you get a degree, before you are allowed to get a credit card, before you emerge into the world. And the reason that I’m stressing this so much is, obviously, it is no secret that the entire economy of the United States – of the world – but especially of the United States, almost stopped a little bit more that one year ago, brought down by the misuse of credit, brought down by inappropriate mortgages, brought down by the shenanigans, the greed, the deceit, the lies of Wall Street, the administration, the real estate/mortgage companies, the businesses on Wall Street to begin with- the Merrill Lynches, the Lehman Brothers, all of them- almost destroyed the entire United States economy. I’m not sure if any of your parents were affected by it, but on my own television show, which has been on the air for 9 years, I have never seen anything like it before. One person loses their home every 7 seconds.
**BT:** If a student has a credit card and has established a decent line of credit set up, is it better – in your opinion – to use that card and consistently pay off the monthly bill, or to spend in cash, just from a budget perspective? Do you think that people actually tend to pay less when they have to hand over bills?
**SO:** I wrote a book in 1998, called “The Nine Financial Steps to Freedom,” which really put personal finance on the map. It was in that book that I made the statement that we are so out of touch with money because we are not touching our money any more. You used to look inside somebody’s wallet and there was money. Now you look in somebody’s wallet and all that’s there are credit cards. When you have a credit card, you are out of touch. Let’s just say you charge $1000 on your credit cards. And the bills come in, all they’re going to make you pay of that is, normally, $20 a month. Even when you don’t have $1000 in your account, you’re going to look and that and go, “Wow! I can keep my $1000 in my account, and only pay $20 a month.” And that’s what you will do. Because the fear of that money not being there when you need it comes into play, and before you know it, you’re paying $20 a month, you’re being charged 19, 20, 30% interest. You know, in most cases, when you only pay the minimum, the minimum is 2% a year or 2% of your outstanding balance. The way credit card payments are done is, if you owe, let’s say $1000, it doesn’t matter what the interest rate is, you will pay 2% of that $1000 as your minimum payment. Let’s say that minimum payment is $20, the interest on it could be $30 a month. So, you are not even paying the entire interest, and now you’re in big trouble. The $1000 is $1010 the next month. And although now you only have to pay 2% of $1010, the next month you owe $1020. So, yes, if, in fact, you put money on a credit card, you need to pay it off in full.
Do I also think, however, if you have actual cash to pay for it rather than use your credit card? Yes. But now you’re in a little bit of a catch-22 because you need to establish credit for yourselves, and the way that you do it is through using a credit card and paying it off, showing the institutions that you students, you have the ability to charge something and pay it off in a timely manner. If I were you, I would charge, rather than the $1000 a month on the credit card, even if you were charging $200 a month on a credit card, charge $100 a month and pay $100 in cash, but do not get out of touch with cash. Once you’ve established a high FICO score, and even for myself today, I normally only use cash. I very seldom use a credit card any more, unless it’s for very large ticket items.
**BT:** On sites like Amazon and eBay, it’s very easy for student shoppers to get pulled into and almost addicted to the quest to find the best internet deal. At one point are we going overboard on spending money to save money?
**SO:** Well, normally, all of you spend money that you don’t have to impress people you don’t even know are like. That’s what you normally do. One of the producers, actually, from the Today Show has a daughter. The daughter is fifteen years of age. The daughter wanted to spend just $300- $300 on new clothes for the new school year. Now her mother is a single mother, raising her, and even though she had the money to do so, she is saving that money because the daughter is 15 and she wants the daughter to be able to go to college without student loans. So she said, “No. You have enough clothes, you don’t wear half your clothes.” I was on the phone while this was happening. The daughter threw the most extraordinary fit I have ever seen in my life. “Mommy, I hate you! Mommy, you should die! Mommy, what’s the matter with you? All the other kids have this! Mommy, you are so out of touch!” She went on and on and on. And the texts were coming back and forth, back and forth. The texts were seriously hurtful towards this woman, but thank God she’s a mature woman. The two of us were actually laughing about it, as it was happening. Like, “Is she joking? Is she kidding? She actually thinks she’s going to win this one?” And so although it was very funny for us, it was also not so funny- the absolute pain and agony the daughter was going through simply because she couldn’t buy $300 worth of clothes. So, again, that type of behavior goes into college, where she’s now given a credit card, and she now starts to rebel and she buys everything and anything she wants on that credit card because she wants to look like the other kids, she wants to feel like the other kids. The truth of the matter is you have to think beyond that. I always say to kids, think beyond the first orgasm, okay? Just understand there’s repercussions to every, single thing that you do, whether it’s drugs, sex, or whatever. So just think beyond that. And the same is true with money: think beyond this one sweater or this one, cool deal on eBay, or on Amazon, and that you’re saving money. It’s not. “Are you saving money?” It’s, “Is this a need? Or is this a want?” Because when you graduate college, when you are on your own, as life goes further on, you may be the one responsible for the student loan debt that you’ve created. You’re going to find it very difficult to find a job today. We have almost a 10% unemployment rate, and it is most likely going to rise. The jobs and the opportunities out there for you, today, are not the same as they were a number of years ago. So, you may not think that $100 here and $100 there matters – but it most certainly does. You would be far better off if you took that money, and, rather than buying something that you don’t really need, save it. And if you had a little side job to establish a Roth IRA for yourself, if you put $100 a month away in a Roth IRA, and you started it at the age of 18 or 19, and you did that every single month, with normal market returns over a 40 year period of time, by the time you are essentially 58 years of age - before you’re even 60 – you would have essentially one million dollars. That’s at $100 a month- but let’s just say you waited. You said it didn’t matter, you bought the stuff on eBay, on Amazon, and you waited from 18 to start, until 28 to start – still relatively young at 28, no big deal, right? At 28, if you started at $100 a month, by the time you were 58, you’d have only $300,000. So those 10 years cost you $700,000. And that’s at just $100 a month. You know if you, at this age of 18, started to put money in a retirement account, you maxed it out from 18 to 28, and you never put another penny in there, you would have more money than if you started at 28 and did it all the way until 65. But nobody teaches you those things, they don’t teach you the time value of money. They don’t teach you about the FICO scores. They don’t teach you about being irresponsible to your debtors. They don’t teach you how a grade-point average can absolutely save you a serious sum of money on your car insurance premiums. They don’t tell you those things, so you all emerge from a very expensive education into a world where you may or may not find a job that no longer provides retirement accounts and pension plans and really good health insurance for you. It is still very difficult to get a home now, to qualify for a mortgage, or qualify for a car loan without paying a very high interest rate. Nobody teaches you any of those things and they expect you to financially make it? The book I wrote, The Young, Fabulous, and Broke– the title should have been “Young, Fabulous, Depressed, and Broke.” Because it’s depressing. Once again, the price for a barrel of oil on the commodity markets are back at $80 a barrel. That means a gallon of gasoline is going to very shortly be at $3.00 again, $3.50, very possibly it can go up to $5.00 a gallon again – it almost was there just a few months ago, last summer. So you come out of college at a time when gasoline could be $5.00 a gallon, food has skyrocketed in costs, etc. Even though it may seem cheaper because real estate has come down, nobody can qualify for a mortgage for it. You better know about personal finance, and you better know it now. And if the schools aren’t teaching it to you – I am not joking – you better watch the Suze Orman show every Saturday night on CNBC. All of you have cable, you can all go to iTunes, you can download the podcasts for free. One of my largest audiences are 20-25 year olds. So you better be watching it. You better see the smack downs that I give everybody. And you better get it. You better get – to the women that are reading this – you better get that you’re going to hook-up with some boyfriend and he’s going to convince you to co-sign a car loan for him. You’ll do it because you’re going to think that’s the best way to help other people. And you’re going to be screwed up one end and out the other if you do that.
**BT:** In the realm of dating, do you think that signing a lease with your significant other, right after college, spells disaster?
**SO:** Well, before you sign a lease with somebody, what do you know about them besides how they are in bed? I’m very serious about that. Do you know their FICO score, if they have one? Are they big tippers or are they not? Do they like to buy clothes and spend more money than they should be? Are they responsible with money in terms of paying the bills on time or not? What do you know about your significant other’s personal, financial habits? How do you expect to split the bills? You move in with the person, and, let’s just say, you both hit it lucky. You both get jobs right out of college. You get a job at $3,000 a month. He gets a job at $7,000 a month. You go, and you rent a place, and now your joint expenses are $3,000 a month. How are you going to split those bills? If you split them 50/50, $1500 of your money is 50% of what you make. $1500 of what the significant other is making is essentially 20, 25% of what they’re making. Is that fair? No!. They’re going to have a whole lot more money to spend, that isn’t how you divide bills. You divide bills by adding your incomes together, so 7000 plus 3000 –your take-homes – together, that’s $10,000. Divide it into your joint expenses of 3000, that’s 30%. You pay 30% of your take-home, 30% of 3,000 is $900 a month. 30% of your significant other’s, 7,000, is $2100 a month. Now you have the 3,000 a month to pay the bills, and it’s done equally. But, when you move in together, you better know that before you move in. One out of two people who get married today, get divorced. The number one reason for divorce in the United States of America is arguments over money.
**BT:** Back to setting up a college budget, even during those post-grad years, could you suggest some quick, painless ways to cut down on daily expenses?
**SO:** Yes- don’t buy what you can’t afford. Right? Be very realistic. If you aren’t making a lot of money after your college, or believe it or not, if you’re not making any money after college, it’s “Mommy and daddy, here I come!” If you are bringing home $3000 a month, you cannot rent an apartment for $1000 a month. Because, along with the apartment are utilities, most likely you have a student loan repayment, most likely you’re going to need a car so there’ll be a car payment. Then, you have your cell phone bills, and you want to go out with your friends. You have got to be realistic: what is it going to cost you to live and can you afford it. So you have to play the “Can I afford it?” game. And if you can’t, you have to deny yourself. Less is more when you first come out of college. You come out of college and you’re working, so who cares if that means you get another apartment where you share it with two people? And remember the more money you make, the more money you will spend. So what you’ve got to understand is just because you have landed a job, which maybe is paying you $80,000 a year, doesn’t mean that $80,000 a year is going to continue. You’re number one priority is to create an eight-month, emergency fund, where you literally have eight months of what you know it costs you to live put aside. That is your number one priority. Your number two priority is to make sure, if you do have any credit card debt, that you get rid of it. Your number three priority is that, if you finally get a job, and you are working for a corporation that offers a retirement plan, known as a 401K, possibly a 403B if it’s a non-profit, and they match your contribution – you put in a dollar into this retirement plan – and they give you, let’s say, 50 cents for every dollar you put in, usually up to 6% of your base pay, that you cannot afford to pass that up, even if you don’t have an eight-month emergency fund and you have credit card debt. Because that’s free money. That’s like a 50% return on your money.
**BT:** Can you define 401K for our readers?
**SO:** 401K is an employer-sponsored, retirement plan, where you put money into that plan on a pre-tax basis, meaning you have never paid income taxes on that money, and therefore it needs to stay in there until you are 59 ½ years of age. Or, if you take it out prior to that time, you will pay not only ordinary income tax on it, but a 10% penalty, as well. Many 401Ks are match-a-contribution for an employee, where, again, you put in a dollar, they give you 50 cents, or 25 cents or whatever. That’s an automatic 25% or 50% return on your money. But you have to know about 401Ks, you have to know how they work. You have to know is a 401K for you better than a Roth IRA. So your plan of action would be a 401K, up to the point of the match, and then a Roth IRA, because a Roth will be better. If your employer does not match your contribution, you’re better off with a Roth IRA to begin with, if you qualify. But these are all things that you should know before you leave college. You should not have on-the-ground training. You should leave college knowing the difference between a Roth IRA, a 401K, a matching one, non-matching, what is best in a 401K, what is not. FICO scores, credit reporting bureaus. Do you get life insurance? Do you not? If you buy a car, how long do you finance a car for? You should never purchase a car where you have to finance it, if you have to afford it because you extend the years you pay for it. You should never finance a car for more than 3 years. And the truth is, you should never buy a new car anyway. The day you drive a new car off the lot, you lose 20-30% of its value. You’re better off buying a used car from somebody who can’t afford it. You should never lease a car – biggest waste of money in your life. But what’s the difference between leasing and renting? Nobody’s ever explained it – or leasing and financing a car, nobody’s ever explained that to you.
**BT:** Were you smart about money in college?
**SO:** No! After four years at the University of Illinois in 1973, with $300 in my pocket, with three other friends of mine, I headed out to Berkeley, California. I lived in my van for four months, until I got my dream job as a waitress at the Buttercup Bakery in Berkeley, California. And I stayed a waitress until I was 30 years of age, making $400 a month. I could not have been more stupid with money if I had tried. That’s why I can talk to you all of you like this, and say “I was one of you. I was the young and the broke, and I wasn’t so fabulous.”
**BT:** What has it taken to build up your celebrity persona and gain the trust of your audience? What makes them tune in every week?
**SO:** I tell them the truth. I don’t pretend to be who I want to be. I am who I am. I say it like it is. I do not give anybody any slack, and I do it all out of love. And I have become who I wanted to be in the end. So people love to watch me because they know I’m telling the truth.
**BT:** First date: Picnic or Five-Star?
**SO:** For me? Remember, I’m 58 years of age. Back then, first dates were not picnics and they weren’t five-stars. They were kind of like – what were they? – they were…I don’t even know what they were. But they weren’t either of those.
**BT:** Shampoo: Generic or Brand?
**SO:** Oh, brand.
**BT:** Which brand?
**SO:** I buy Love shampoo and Love cream rinse – I have very coarse hair. And I absolutely love it. I buy it from drugstore.com, but it is expensive.
**BT:** Toilet paper: Two-ply or three ply.
**SO:** Absolutely two-ply.
**BT:** QVC or Gilt Group?
**SO:** Given that I’ve been on QVC for over 14 years now and have sold over 100 million dollars on QVC alone, absolutely QVC.
**BT:** Visa or Amex?
**SO:** Amex. You have to pay off your bill in full at the end of every month.