One of the issues the young college graduate will likely face is how to responsibly utilise their credit cards. That is, if they are not taught how to do so beforehand. Of course, they probably won’t realise irresponsible utilisation is an issue for a while. Not until they are being strangled by debt because of the bad habits they have inculcated over the years.

I’ve long been a proponent of teaching students about finance in schools as this, in my view, would help to ingrain better attitudes towards money, sooner rather than later, and the hard realities of credit card debt is one such topic that should be high on the curriculum. And, for various reasons, many parents and guardians seem to be reluctant to talk to children about money. Perhaps they think it encroaches on children’s innocence too early, that adulthood will be time enough for them to learn. But there are certain basic money lessons that would be vital for them to learn early. Since we’re currently in graduation season, what better time, then, for young people on the verge of joining the ranks of the workforce to become mindful of how the world works, especially as it relates to their financial well-being?

Know your credit card utilisation rate

Too many young people don’t quite understand that a credit card isn’t a kind of magic wand that makes money materialise out of thin air. Well, yes, on the face of it, it sort of does that. But, as in most things in life, there’s context. Most people understand that a credit card is a payment card that is used in lieu of raw cash that allows payment for goods and services from a merchant. But this arrangement between cardholder and merchant is only facilitated based on the issuing bank’s belief that the cardholder has the capacity to repay the amount. If the bank doesn’t deem the cardholder fit, when the card is swiped, it will alert the merchant and subsequently deny the cardholder access to the funds to go through with the sale.

This is why you should be judicious in the use of your card. There’s a temptation to run the card willy-nilly. But conventional wisdom dictates that credit card utilisation rates should be kept between 10 and 30 per cent. Credit card utilisation is really the percentage of your credit limit that you’re using. A high utilisation rate could be an indicator that you’ll have difficulty paying your credit card bill on time. To know what your utilisation rate should be, you must first know your credit limit. Divide the balance on your monthly statement by your credit limit and that will give you your utilisation rate. So, let’s say your credit limit is $150,000 and you spend $15,000 during your billing period, your utilisation rate will be 10 per cent (15,000 divided by 150,000 and multiplied by 100 to get the percentage.

Why is it important?

If you’re not keeping track of your utilisation each billing cycle, you can very easily end up with a percentage that quickly gets out of hand. And because interest is charged and, importantly, compounded, if you don’t pay off your bill at once, opting instead to pay the minimum figure, your debt can snowball rapidly. Trust me when I tell you, it can take months, sometimes even years, to recover from one simple late payment that isn’t immediately sorted out and left for the interest to grow, month after month.

Spend each month only what you can afford to pay back early. Also, there’s no law that says you can’t make payments more than once each billing cycle. Remember, low credit card utilisation rate will boost your credit score. You may not be concerned with things like buying a home yet, but good credit card practices from now will go a long way in your credit ratings when that time comes. If your utilisation rate isn’t good, and you are in debt up to your eyeballs why would a financial institution approve you for a mortgage when the credit bureau gives you a low credit score?

Be wary of fraud

In this increasingly digital age, college graduates should also be mindful of fraud. The world has not yet beaten you down into a cynical caricature of your former self, but be careful. Especially when it comes on to card usage. Not every site is above-board in their dealings. Ensure that the company is reputable before blithely giving out your card information to some faceless entity out there in cyberspace. Never give out your card’s secret PIN (personal identification number) especially when asked for your CVV (card verification value), a three-digit number found on the back of the card, not even to a trusted friend. These are two completely different things. PIN numbers allow you to use your card at an ATM or when making an in-person purchase for a cash advance against the card. Your CVV, meanwhile, proves to an online merchant that you actually have the physical card and helps reduce fraud.