KT for good: Credit cards will not solve Covid-19 budget woes
Dubai - Credit card debt continues to be the "most expensive" form of unsecured debt in the UAE.
At a time when money is tight, it is tempting to swipe those plastic cards but, remember, this "easy access" to credit may land you in considerable debt in the near future, experts have warned.
Credit cards, with all their charges and penalties, are not the solution to budget challenges from Covid-19-triggered pay cuts. Whether you have one or 10 in your wallet, the golden rule remains: Swipe wisely.
Credit card debt continues to remain the most expensive form of unsecured debt in the UAE, and probably the most mishandled one too, financial experts noted.
Speaking to Khaleej Times, Ambareen Musa, founder and CEO of Souqalmal.com, revealed that it isn't uncommon to hear of borrowers who have exhausted other forms of credit, such as personal loans or those who aren't eligible for such loans, applying for and using credit cards to meet all sorts of expenses.
"But, with interest rates of around 40 per cent per annum, based on the Annual Percentage Rate, one can very easily slip into a debt spiral," she said.
According to a UAE-wide survey conducted by Souqalmal.com over two years ago, 83 per cent of the respondents had at least one active debt obligation; these could be personal loans, home loans, car loans, or credit card debts. Alarmingly, 27 per cent of the survey participants said that they had three or more active debts.
Steve Cronin, expat financial coach and founder of DeadSimpleSaving.com, said that many people borrow to get a fancy car as soon as they arrive, because everyone else has one.
"Too many people have multiple credit cards and personal loans trying to manage their cashflow, especially to handle their annual rent payments, job loss, or family issues overseas," he said. "Many people also have mortgages because they want to get on the property ladder, think real estate prices are cheap and also think paying rent is a waste of money (it isn't necessarily!). There are plenty in the UAE who have all these types of debt at once.
Manage debt in a timely manner
Cronin advised residents to never purchase anything using debt that will cause them difficulty in making the loan payments if they lose your job.
"Always pay off your credit card in full every month, as interest rates can be above 40 per cent per year," he advised. "Putting more on a card than you can pay off could lead to a catastrophic debt spiral, as the debt balloons very rapidly. If your debt's interest rate is five per cent or more, you should prioritise paying it off as fast as possible. If it's below four per cent, then make the monthly payments but there's no need to pay off extra chunks compared to investing the money sensibly instead."
Musa advised residents to take a close look at their budget and strip it down to the bare minimum.
"Since debt relief is only temporary, you will have to save up as much as you can, to honour your debt obligations in the future," she said. "If you are forced to tap into your savings and emergency fund to keep up with your debt commitments, make sure you replenish this pool of savings slowly as you go along."
It may also be tempting to reach for your credit cards at this time, but this seemingly easy access to credit may land residents in considerable debt in the near future.
"If you already have an outstanding debt on your credit cards, make sure you pay off as much as you can, or even just the minimum five per cent balance during the most difficult months. Not meeting this minimum payment requirement can get you penalised heavily," Musa warned.
Banks can offer only limited relief
Cronin noted that the Central Bank of the UAE has made it clear that it expects banks to treat lenders fairly and offer individuals affected by the Covid-19 lockdown loan payment holidays.
"If you haven't had a paycut, you may get one month's holiday. If you can prove that you've received a significant paycut or job loss, banks will offer you payments of two to six months' holiday, depending on the bank," he said.
Musa said that borrowers who have been financially impacted in the wake of the pandemic, have access to a 3-month penalty-free payment holiday on loans and credit cards, and interest free installment plans of up to six months (in some cases with zero processing fees) on grocery purchases, school fee payments, and utility bill payments made with credit cards.
"However, one size may not fit all when it comes to standard debt relief measures. Many borrowers may not be able to qualify for such debt relief, especially owing to a poor repayment track record. Therefore, borrowers must reach out to their banks to see what other debt relief or debt restructuring options are available to them," she said.