A step-by-step guide to getting out of debt in UAE

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A step-by-step guide to getting out of debt in UAE

Dubai - It is important to get out of debt, but it is also equally important to stay out of debt.

By Ambareen Musa/ Personal Finance

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Published: Sun 11 Jun 2017, 4:18 PM

Last updated: Mon 12 Jun 2017, 1:45 AM

Debt, if left overlooked, can spin out of control, very fast. Many UAE residents find themselves reeling under a personal debt crisis, simply because they borrowed more than they could afford to repay, or were not aware of how overwhelming the debt can become if not managed properly. Here are six steps to help anyone dealing with debt, work out a customised repayment strategy to become debt-free sooner:
 Make a list of all your debts
The first step is to take stock of your current debt situation and to figure out exactly how much debt you owe. Start with listing all your existing debts - all loans and credit cards - along with their interest/profit rates and the outstanding amount for each.
Calculate your DBR - Can you negotiate a better payment plan with the banks?
Once you have your total debt calculated, the next step would be to calculate your Debt Burden Ratio (DBR) or debt-to-income ratio, which shows how much of your income goes towards debt repayments every month. Based on UAE Central Bank guidelines, your DBR should stay within 50 per cent.
The DBR will show how indebted you are, and a higher ratio will mean you need to get your debt situation under control. Calculating your DBR will also help in assessing whether you're able to qualify for debt consolidation. If your DBR is too high you most likely won't meet the banks' eligibility criteria, and will have to look for other options. You could speak to your bank about a debt restructuring arrangement, wherein the bank can put you on a revised payment plan or even waive off late payment penalties.
The zero per cent balance transfer option on credit cards may also be worth exploring. You can transfer your existing credit card outstanding balance to a new card that offers a zero per cent rate on balance transfer for usually up to 6 months. But make sure you repay all or most of the outstanding debt during the interest-free period.
Put together a plan - Evaluate your repayment options
Once you know where you stand with the banks, and whether a new repayment plan is feasible or not, the next step is to take matters in your own hands. Think about how you would prioritise your debt repayments.
There are two commonly recommended strategies in this regard. The first is called "debt stacking" wherein you list all your debts in descending order of interest rates, and aim to pay off the one with the highest rate first. The second is called "debt snowball" wherein your aim is to get rid of the smallest outstanding debt first. While the former is better purely from a cost-efficiency point of view, the latter can be more psychologically motivating. Pick the one that works best for you.
 Examine your budget - Where can you make cutbacks?
Now that you have a plan in place, how do you gather the resources to put it in action? This step highlights the importance of budgeting and how making small cutbacks in your day-to-day spending can free up enough cash to help you get rid of your debts faster.
Analyse which expenses can be completely done away with, and which others can be slashed. For example, moving to a cheaper accommodation can help you cut rental payments. Or you could downgrade your mobile plan or even cancel your fixed telephone line and TV subscription.
 Assess your earning potential - Can you boost your income?
Once you've trimmed the expenses, you can then start thinking about ways to increase your income. Is it time to ask your employer for a raise? Or perhaps, a new higher-paying job is what you should be looking for.
If your current employment contract permits it, you can also consider working as a freelancer to earn a bit extra. Another option is to tap into your interests and hobbies to start a small business on the side.
 Stick to the plan and track your progress
It is important to get out of debt, but it is also equally important to stay out of debt. Once you've paid off most of your debt, or have brought it down to a manageable level, your top priority should be to stay away from new debt. Cut up and close the credit cards that have been settled, and learn to live within your means.
The writer is the founder and CEO of souqalmal.com. Views expressed are her own and do not reflect the newspaper's policy.

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