The Debt Panel: 'I have racked up $13,600 in credit card dues'

Sharjah reader is confused about how his liabilities increased significantly despite paying a lump sum for late payment penalties and interest

If you don’t pay off your credit card balance each month, it starts attracting interest. Nick Donaldson / Getty

Last year, I took a credit card with a Dh15,000 ($4,084) limit from a bank in the UAE.

However, I faced financial problems because of job loss and defaulted on a few credit card payments. The bank proceeded to give my cheque to the police and I had to pay a fine.

I have found a new job now, but on a reduced salary. I want to settle this dispute and close the credit card account with the bank.

I spent only Dh7,500 worth of expenses using the credit card and have already paid Dh25,000 to the bank in the form of late payment fees, interest and over-limit charges.

However, the bank is now demanding an additional Dh25,000 to close the credit card account. How is it fair that I need to pay the bank Dh50,000 cumulatively after spending only Dh7,500 with the card?

Is this legally permissible? How can I resolve this issue? MN, Sharjah

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

When you take out a loan or a credit card, you are to some extent placing your financial life in the hands of the bank. This is especially true if you then lose your job and struggle to make payments. Are the banks going to be gentle with you? No, they are not.

I wonder if you only put on your card items that you could afford to pay off in full each month. That’s how credit cards should be used. If you don’t pay off the balance each month, it starts attracting interest. Every month that goes by increases the risk of problems if you lose your job.

If you read through the terms and conditions of your credit card, you would see that it is a high-risk tool for borrowing compared with a personal loan.

The bank is lending you money (your card balance) without any guarantee of getting it back. The high interest payments generate profit for the bank based on the risk they have taken on you, while the fees and charges encourage you to prioritise paying them back.

Missing payments will lead to a spiral of over-limit charges, late fees and interest charged on top of the interest you haven’t paid off yet. This is how Dh7,500 turns into Dh50,000, though I am surprised that has happened within a year.

If they haven’t already, the bank should provide a full breakdown of all the charges and how they are calculated. Check this against your card’s terms and conditions to make sure they align. They may be prepared to reach a settlement if you engage with them.

Missing payments will lead to a spiral of over-limit charges, late fees and interest charged on top of the interest you haven’t paid off yet

Steve Cronin,
founder of DeadSimpleSaving.com

Try multiple channels: call the collections department, talk to your branch manager and even try to talk to someone in the head office. Prepare in advance with all your card payments, charges, current income and total expenses, with a clear idea of how much you can pay.

A manager will have more discretion to waive some or all of the excess fees than the front-line staff, so try to talk to someone senior. If you are able to make a large payment upfront, the bank may be willing to reduce the total owed. If you can only afford a series of small payments, they may hold out for the full amount over time.

The bank may also be prepared to convert part or all of the outstanding balance into a personal loan. This will at least reduce interest and fees if you cannot pay off the total amount agreed within a few months.

If the bank has not given you a satisfactory response within 30 days, you can complain to the Central Bank Consumer Protection Unit. However, if the bank has stayed within the card’s terms and conditions, there may not be much of a case.

This is a painful lesson but a useful one. Avoid getting trapped in a cycle of debt in future and manage your cards, loans, cash and expenses carefully so that you are resilient against unexpected events such as job loss or sickness.

Debt panellist 2: Carol Glynn, founder of Conscious Finance Coaching

I'm so sorry you are facing this issue. Congratulations on finding new employment and well done on taking action to resolve your debt issue with the bank.

When you signed up for the credit card, you will have agreed to certain terms and conditions, including interest rates, late payment fees and other charges. These terms specify the consequences of defaulting on payments, such as additional penalties or fines.

It's important to carefully review the terms and conditions of your credit card agreement to understand the basis for the bank's calculation of the amount now due.

The interest rates on credit cards are very high and balances due can double in a short period of time. However, even with that in mind, it is surprising for a Dh7,500 balance to turn into Dh50,000 within one year.

Have you checked your account to ensure there were no fraudulent transactions adding to your amount due? Do you have copies of the credit card statements issued to you each month? You can use them to work out how the amount now due accumulated.

Compound interest is a mechanism by which interest is calculated not only on the initial principal amount but also on any accumulated interest. In the case of credit cards, if you carry a balance from month to month, compound interest can significantly increase the amount you owe over time.

To illustrate this, let's consider an example with an interest rate of 3.99 per cent per month, late payment fees of Dh150 and over-limit fees of Dh250 per month. After one year, I would estimate the amount due to be approximately Dh20,580.

This compounding effect continues as long as you carry a balance, leading to an ever-increasing debt. Therefore, it's crucial to pay off credit card balances as soon as possible to minimise the impact of compound interest and avoid accumulating excessive debt.

To resolve this issue, you should consider the following steps: carefully read the terms and conditions you agreed to when you obtained the credit card. Pay attention to clauses related to default, penalties and closing the account.

Review your credit card statements, what charges are on there contributing to the outstanding balance and are they legitimate? Contact the bank and ask them to provide calculations behind the amount due. Analyse them to ensure they are correct.

Explain your financial situation and willingness to settle the debt. Try to negotiate a resolution that is fair and affordable for you, taking into account the payments you have already made. It may be possible to negotiate a reduced lump-sum payment to settle the debt.

When you review the terms and conditions, apply the interest rate, late fees and other penalties and if you believe the bank's calculations are incorrect, provide the bank with your evidence using their official complaints email.

If they do not satisfactorily resolve the issue within 30 days, you can then raise your complaint with the Central Bank.

Remember, resolving this dispute will likely require patience, open communication with the bank and possibly legal assistance. It's important to gather all relevant documentation, such as your credit card statements and payment records, to support your case.

Debt panellist 3: Rasheda Khatun Khan, financial wellness expert and author of Millionaire Mindset – 6 Steps To A Wealthy Life

Credit card debt can get out of hand very quickly and very easily. It's great that you are doing what you can to settle the debt.

The first step would be to request a full statement from the bank. You want to understand how an amount of Dh50,000 has been calculated from a debt of Dh7,500.

Ask to speak to a manager so they can help you to understand the numbers clearly. From this, you will understand if it's a fair calculation. You can either dispute the numbers or request a payment plan that's affordable to you.

If you are unable to get a resolution, I suggest you lodge a complaint with the Central Bank explaining your situation. You can do this online.

These systems have been put in place to ensure the fair treatment of the consumer. Be clear and precise with your numbers and request.

It's also important to rewind and evaluate the reasons you got into debt in the first place. We must anticipate and prepare for unexpected costs and change of circumstances by having an emergency fund.

The number one reason for debt is not having the money for unexpected costs. Remember life is such that it's inevitable that these costs will come up, so again, we must prepare for them.

An emergency fund as a minimum should be at least three months of expenses. If you don't have that, then start building it up with your first target being one month. Many people do not prioritise this and we should, without it debt is inevitable.

So tackle this in two parts – one the repayment of the debt and two preventing it from happening again. A life well-planned is a life well-lived.

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]