The Debt Panel: 'Is it worth consolidating my debts for a second time?'

The Dubai resident took out a loan to pay off credit cards but is back in the red after their salary was reduced

Steven Castelluccia / The National

I have been juggling a few debts for the past couple of years and they are now beginning to catch up with me.

I took out a personal loan two years ago with the aim of paying off my three credit cards. I did pay them off, but since the Covid-19 pandemic started, my salary has been reduced and I have been relying on my credit cards to pull through the month financially.

I have now brought them back up to their limits – one of Dh10,000 and the other two are Dh15,000. I am also still paying the personal loan, which is slightly more than Dh1,000 in monthly instalments.

My biggest issue is that I am taking cash from the cards each month to pay the minimum amount owed on them, so the balances are not coming down.

Would you suggest restructuring my debts to pay off the personal loan and the credit cards at once and starting all over again with a new personal loan? I am not sure what to do and am worried that I will never get out of debt and start saving. BK, Dubai

Debt panellist 1: Steve Cronin, founder of DeadSimpleSaving.com

You are trapped in a debt spiral of building up card balances, paying the minimum on them by adding further to the balances and then consolidating them with a personal loan.

Taking cash on credit cards is to be avoided except in dire emergencies. As you have seen, there is a fee for taking the cash out, then an immediate increase in balance and interest on that balance. No wonder you have hit your limits again.

This is simply buying you time, but it is no way to live. You correctly worry that you may never save or have anything to show for your hard work if you carry on this way.

You also have no spare buffer to provide resilience – losing your job, taking another pay cut or dealing with a large hospital bill back home could put you in real trouble.

You must resolve to radically change your life and your approach to debt. It will be painful until your debt is reduced and the job market improves. It will, however, put you back on track for a financially secure future.

First, secure a debt consolidation loan (again). Prepare a summary of your debt, income, monthly payments and other expenses. Check with your bank and even with other banks to find the best interest rate.

Understand the effect of extending the term of your loan as it may reduce your monthly payments to a more sustainable level, even if it takes you longer to pay it off. Remember, your first task is to ride out this post-Covid period of uncertainty.

The consolidation loan will give you some breathing space but, this time around, ensure that you do not build up your card debt again. You must do everything you can to boost your income and slash your expenses.

Is there any additional work you or family members can do? Become creative and resourceful. Can you downsize your living quarters, send family back home and cut your phone, food and travel expenditures? Set a strict budget for each category per month and do not exceed it.

If you must use a credit card, pay it off immediately in full. You must restore the link between spending and paying, almost as if it is a debit card. Living within your reduced means, probably throughout 2022, will give your best chance of a better life.

Debt panellist 2: Philip King, head of retail banking at Abu Dhabi Islamic Bank

I am sorry to hear you are in this situation. It is important to know you are not alone in dealing with this problem, so asking for help is the first step to putting things back under control.

A debt restructuring plan can be a good solution by consolidating your loan and credit cards into one monthly payment, which some people find much easier to manage than dealing with several bills.

It is vital to be on top of all your spending and debt repayments, and to keep the total of these lower than your income so that your total debt can come down each month.

Taking cash advances on credit cards is the most expensive way to use your credit card as you are charged large transaction fees, while the interest on cash advances is higher than that of standard credit card purchases

Carol Glynn,
founder of Conscious Finance Coaching

If you decide to try to pay each debt off individually, it is best to list them in order of the highest to lowest interest rate, which is often referred to as "APR", or annual percentage rate. Pay off the highest on the list first until it is completely gone, and then pay each one off in that order.

So, for example, paying off a credit card with a 39 per cent APR until it is zero and then paying off a card with a 29 per cent APR next can save you significant amounts, compared with paying the same amount each month on all the cards.

This will also help you to clear your debts quicker. However, you will also need to make the minimum payments on the other cards to avoid charges.

To help you make an informed decision on whether to take out a further personal loan, try to gain a clear understanding of the monthly instalment you would pay if you consolidated all four debts into one and compare this to the payments you make each month across all products.

Then you can determine whether this will really help you to reduce your debts over time.

Debt panellist 3: Carol Glynn, founder of Conscious Finance Coaching

This is a difficult situation you are in but it is clear you have done your best to keep up with minimum repayments. This shows responsibility and a willingness to resolve your situation.

However, taking cash advances on credit cards is the most expensive way to use them as you are charged large transaction fees, while the interest on cash advances is higher than that of standard credit card purchases.

Also, interest is usually accumulated from the date of the transaction, making it even more expensive. While well-meaning, this approach will make clearing your balance even harder in the long run. I suggest you cease this practice and find other ways to fund your minimum payment requirements.

I would recommend requesting a consolidation loan from your bank. Shop around with other banks so you can find the best interest rate available. Once you receive the cash, pay off all your debts and then cancel your credit cards. This will reduce the risk of raising your credit card debt again.

Can you reduce your expenses in any way? Print out your credit card and bank account statements and review them in detail. Is there any scope to reduce expenses?

Common ways to save include cancelling subscriptions, reducing your use of taxis, buying your groceries from cheaper supermarkets, cutting down on eating out and food deliveries, and socialising less for a period of time. No matter how small the savings may seem, every dirham you can reduce will help to ensure you are closer to clearing your debt.

Many companies are reporting they are returning to pre-Covid levels of business activity. Have you discussed the reinstatement of your previous salary with your employer? I would suggest discussing this with your manager as this will help you resolve your debt situation faster.

As soon as you are able to meet your monthly debt responsibilities, make sure to also set an amount aside every month towards an emergency fund. This will provide some financial security and help to protect you from falling into this debt situation again.

The Debt Panel is a weekly column to help readers tackle their debts more effectively. If you have a question for the panel, write to [e-mail]