The Debt Panel: 'I maxed out my credit card to pay for unexpected expenses'

The Dubai resident is seeking advice on how to pay off the debt on a lower salary as compounding interest is quickly adding up

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I have had some unexpected expenses this year — expensive car and home repairs on my property back home — and used my credit card to pay for them.

They took me by surprise and I did not have any savings to cover these costs as my salary was reduced during the Covid-19 pandemic and has yet to be reinstated to the original amount.

Since then, I have been unable to put money aside for emergencies.

Because I have maxed out my credit card to cover these expenses, I am finding it difficult to keep up with the payments — each month I seem to owe more than the original amount that I used to pay for the repairs on my car and property.

I have only been paying the minimum amount as I also have to account for daily living expenses, as well as rent, utilities, food, school fees for my children and other incidentals.

I am concerned that I will be paying off this credit card for years as the interest rate is so high and I can’t afford to pay more than the minimum monthly instalment.

Is there another way that I can pay off the credit card quickly and start saving for the future? Please advise. HS, Dubai

Debt panellist 1: R Sivaram, executive vice president and head of retail banking products at Emirates NBD

A credit card is a financial tool that can help you to manage your daily payments and transactions conveniently, have access to short-term credit, avail attractive shopping deals and discount programmes, as well as earn rewards based on your spending.

However, if your credit card spending is almost the entire limit like you have mentioned, monthly payments and accumulated interest can increase and lead to potential financial problems if you are not able to pay back the outstanding amount in full.

Paying only the minimum amount required every month is a common practice adopted by many cardholders.

However, bear in mind that this can also result in the debt continuing to grow due to compounding interest charges, higher regular payments and the threat of falling into a debt spiral.

One thing you can do immediately is speak to your bank and share the full details of your financial position.

Based on your proactive approach, your bank will most likely be open to reviewing the situation and possibly consolidate your outstanding debt into a low-interest instalment plan on your credit card or convert it into a personal loan with a lower interest rate and a longer payment term.

Ideally, you should seek a low monthly repayment over a longer time period, which will provide flexibility while hopefully avoiding the need to borrow again.

When approaching your bank for a loan consolidation, you should have a clear plan detailing your income and your expenditure — this will help you to clearly define how you propose to repay it and become debt-free.

The bank may also want you to surrender your credit cards to prevent you from incurring further debt while you pay off the loan. If you have credit cards with another bank, then you should also stop using these during this time.

It is important to also work on a budgeting plan and set aside a monthly limit on your discretionary spending outside of essentials such as groceries, utilities, school fees and others. Try to foster a habit of putting a percentage of your earnings aside as savings to help you on a “rainy day”.

It is commendable that you are reaching out for assistance with your situation to put in place changes before it is too late.

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

We all have aspirations and desires for the kind of lifestyle we want to achieve.

While not everything can be quantified in terms of money, many of the lifestyle decisions that we make have financial implications.

This is usually constructive as it motivates us to work harder and have greater ambition. However, in certain conditions, it can lead one astray financially by funding through excessive debt that is beyond our ability to repay.

A credit card can help you to manage your daily payments. However, if your spending is above the limits, the monthly payments can lead to potential financial problems.

Regarding your situation, you must immediately speak to your bank and discuss your financial position.

The bank will assess your current situation and may devise a debt consolidation plan in line with your repayment ability.

You can avoid the high interest rates applicable to your credit card by requesting a monthly instalment plan that allows you to pay off your debt in a structured manner.

Your bank may consider consolidating your credit card debt into a personal loan with a lower interest rate and a longer payment term. This will provide flexibility and will help you to avoid the need to borrow again.

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

The first thing for you to do is assess your income and expenses to establish your cash flow.

Write down your household income and everything you have spent money on over the past two to three months.

You need to work out exactly what disposable income is left to put towards the debt.

Next, work through your list of expenses and ask yourself whether there is anything you can either cut out or reduce, even temporarily.

Doing a no-spend challenge or savings challenge can be effective in helping you to work out which expenses you can forfeit while maintaining your lifestyle.

The other factor to take into consideration is your income.

You mentioned that you had a pay reduction during the pandemic. Could you look for another job, retrain or consider a side hustle?

With inflation and rising living costs, having a lower income is going to work against you paying off your debt. Think about how you can make yourself more valuable in your industry and aim to learn high-paying, in-demand skills.

You also need to plan for paying down the debt and building an emergency fund.

There are debt repayment calculators online — ensure you know the interest rate and all charges applied to the debt, then experiment with a debt repayment calculator, working out your monthly repayment over different time frames.

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Doing a no-spend challenge or savings challenge can be effective in helping you to work out which expenses you can forfeit while maintaining your lifestyle.
Alison Soltani, founder of Leap Savvy Savers

You also need to factor in building an emergency fund, otherwise you could end up back in the same position or worse during your debt payoff journey.

For example, you may choose to pay off your debt over 24 months rather than 18 months and simultaneously build an emergency fund.

To start, one month’s expenses is imperative. An ideal emergency fund is three to six months of expenses, depending on your dependents and lifestyle.

In addition to a robust emergency fund to cover unexpected expenses, building sinking funds to pay for large, expected expenses such as school fees, visa costs or car insurance can help you to maintain a sustainable budget.

Work out the large expenses you expect to pay over the next six to 12 months and start putting money aside for them each month. This helps to avoid getting into debt or using a credit card in the future to pay these costs.

Finally, you could look at transferring your balance to a credit card or personal loan with a lower interest rate to reduce the overall amount you will pay.

The extent to which this is a viable option for you will depend on how much the debt has affected your credit score, which is easily accessible at Al Etihad Credit Bureau. However, if you can negotiate a lower interest rate, this could considerably reduce your debt burden.

Updated: October 19, 2022, 5:00 AM
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