The Debt Panel: 'I overspent on my credit card and can't afford to pay it off'

The Dubai resident was finally able to visit family after not seeing them for two years and went overboard with spending

Nick Donaldson / Getty
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In December, I was finally able to go home and visit my family after not seeing them for nearly two years because of the pandemic.

Because I did not have any savings, I used my credit card to pay for everything — the flights, gifts for my family, taking them out to dinners and even paying for shopping trips.

I was so happy to see my family that I was not thinking about how much I was spending.

However, the first bill from my trip arrived in January and I was shocked to see that I had spent about Dh20,000 ($5,445), which I cannot afford to pay off all at once.

I am very worried about the compounding interest on the card and that the amount I owe will quickly increase beyond my control.

Should I consider taking out a personal loan to pay it off immediately — or are there other options that I should consider? KB, Dubai

Debt panellist 1: Sameh Awadallah, acting global head of retail banking at Abu Dhabi Islamic Bank

I am sure that it must have been wonderful to see your family after so long. I hope you all had a great time together.

With reference to your situation, the first step you should take is to talk to your bank and discuss the matter as soon as possible because delaying the payment any further can have expensive consequences.

It is also important for you to review your daily expenditures and avoid any extra expenses for the time being. The larger your credit card balance grows, the more will be added on top of the amount you owe.

Get in touch with your bank, explain your current financial position and let them know that you intend to repay it. If you are a loyal customer with a record of timely payments, your bank is likely to work with you on a single late payment.

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To begin with, you must immediately focus on spending only on the basic essentials and cancel your credit cards to avoid any further unplanned purchases.
Jaya Ratnani, managing partner at Freed Financial Services

If not, taking out a personal loan is a good idea to pay off your card debt in full as they often have lower rates and longer payment terms.

You will be able to repay the loan in affordable equated monthly instalments by selecting a tenure that suits you.

Alternatively, shop around for a card with a balance transfer facility. Some banks in the UAE will refinance your outstanding credit card balance from other banks with preferential rates to be paid back in easy instalments.

This is also the time when you should consider having a financial safety net. It is a good idea to try to build one for unforeseen circumstances, unexpected bills and saving for the future.

It is recommended that a good financial safety net is equal to three to six months of your standard expenses.

By doing so, you will avoid stress, feel more secure and be able to enjoy time with your family rather than spending too much time worrying about your finances later.

Debt panellist 2: Jaya Ratnani, managing partner at Freed Financial Services

Any ad hoc debts and unplanned expenditures can eventually lead you to a crisis and hamper your financial management plans.

You seem to have landed in this situation considering you made several unplanned expenditures while at home on holiday.

It is easy for people to be overcome by credit card debt, which typically comes with high interest rates.

Some people pay the minimum amount due without realising the interest is compounded on unpaid amounts and results in the credit card debt mounting.

To begin with, you must immediately focus on spending only on the basic essentials and cancel your credit cards to avoid any further unplanned purchases.

If you have a single credit card facility, the best way forward is to contact the bank and request a settlement plan. The bank will assess your situation and devise an instalment plan in line with your repayment ability.

If you have more than one credit card, it is recommended that you consolidate your debt in the form of a single payment.

The advantage of consolidation is that you deal only with one institution, making it easier to keep better track of how much you owe to a single entity.

You can also opt for a personal loan from the bank where your salary is transferred. This will have a much lower interest rate compared to the credit card.

Debt panellist 3: Alison Soltani, founder of Leap Savvy Savers

It has been hard being separated from family for so long during the pandemic and I understand that you were excited to see them. However, you need to prioritise paying off the debt and avoid this situation in the future.

The first thing to do is stop any further spending on the card. I suggest that you then review your budget by tracking your spending and reviewing your card statements and receipts.

The next step is to organise your expenses into categories, such as groceries, rent, bills and clothing. Sort your needs from your wants and cut out unnecessary expenses to free up more cash to put towards the debt.

You could try a no-spend challenge to help motivate you to cut some non-essential expenses.

There is an added benefit of discovering what you truly value spending money on, which will help you maintain control of your spending in the future.

Starting a side hustle could also help you pay off your debt faster. Depending on your skill set, you could offer a paid service, product or sell excess items from your home.

To help you decide on an appropriate side hustle, think about what you enjoy doing, what people would be willing to pay you for and what specialist skills or knowledge you possess.

In terms of negotiating a lower interest rate, you could look at taking out a personal loan to pay off the credit card.

However, you may be tempted to start spending again on the card. It may be a better solution to transfer the balance to a card that offers a payment plan or a temporary zero per cent interest welcome offer. Some offer six months of zero per cent interest instalments.

Reducing spending, earning extra money and transferring your balance to a lower interest loan or card will help you pay down this debt faster, but the most important thing for you is to learn from this experience. It is worth setting aside some money to avoid situations like this in the future.

Once you have evaluated your budget and cut expenses, allocate an amount each month that you can set aside to save for an emergency fund to help you during unexpected financial crises.

For trips and family visits, you could start a sinking fund. This is where you estimate the amount it will cost you and divide it by the number of months you have to save for it.

For example, to save for a Dh20,000 trip in 10 months, you would save Dh2,000 a month.

Set aside that amount in a savings account every month and you will be prepared to have an enjoyable, debt-free holiday with your family.

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 pf@thenational.ae

Updated: February 16, 2022, 5:00 AM
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