I work as a food and beverage controller in Dubai earning Dh7,700 a month. I have four credit cards and meeting the payments every month is very hard. The interest rates are high and I have contacted several banks in an attempt to consolidate the debt into one monthly instalment, but they say I am not eligible. This is because of my low credit score, as I have missed many payments. My debts are:
Credit card 1: Dh55,000
Credit card 2: Dh14,000
Credit card 3: Dh7,000
Credit card 4: Dh5,000
The reason for borrowing the money was to pay for a family medical emergency. This was not manageable on top of all my other expenditure, so I chose to use credit cards. Since then the debt has just piled up. I am originally from India and have lived in the UAE for seven years. My other expenses are Dh1,000 for rent and Dh4,000 for other lifestyle costs. Please can you offer a practical solution to help me solve this problem. BA, Dubai
Debt Panellist 1: Philip King, head of retail banking at Abu Dhabi Islamic Bank
I’m afraid you’ve fallen into the common pitfall of using cards as a long-term borrowing solution. While cards can be incredibly useful, they need to be managed with care; ideally borrowing an amount that you can afford to repay and making repayments on time. Cards should be used for small regular purchases rather than emergencies. If applied correctly, they can help raise your credit rating allowing you to qualify for more competitive borrowing options as you will be deemed as lower risk by banks. Unfortunately, in your case, you are experiencing the consequences of missing payment deadlines.
You should continue to negotiate with your banks for a consolidation loan, particularly the bank holding card 1, which accounts for nearly two-thirds of your borrowing. This consolidation loan, which you really should have spoken to your banks about at an earlier stage, would be used to pay off all of your card debt providing a more sustainable and affordable programme of repayments. Failing this, you should aim to lower your expenses as much as possible, ensuring you meet your card repayment schedule on time while trying to pay more than the minimum due each month. Such an approach will demonstrate to banks that you are reliable while also elevating your credit score, increasing the willingness of banks to lend to you.
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Many struggling borrowers like yourself find that debt consolidation is often not the solution to their debt woes. There's the stringent eligibility criteria, such as the Debt Burden Ratio limitation as well as a credit score restriction. So if it is not working out, you should move on and find another solution. And since all your debt is high-interest credit card debt that's multiplying as we speak, you must act fast.
Get in touch with the individual banks and credit card companies, explain that you are unable to keep up with the repayments and ask them to convert the outstanding balance on each card into a fixed-instalment loan. This will not only drastically lower the interest rate, but will also give you a clear plan of action: repaying the balance in instalments over a fixed tenure.
As you figure out a repayment strategy, you must also address the serious income-expense mismatch you have created. Simply put, your expenses are too high. You need to take a hard look at where your money is going. You are spending Dh4,000 to keep up with your current lifestyle, which is more than 50 per cent of your income. Given your present debt situation and the difficulties you face repaying your credit card debt, you must rein in your expenses if you want a financially stable future.
Strict budgeting is the way to go. Make a list of your monthly expenses and see where you can cut back. Whatever you're able to save this way must go towards paying off your credit cards one by one. Pick a debt repayment strategy that works for you. You can try the 'debt snowball' method and pay off the smallest credit card balance first or go with the 'debt stacking' method and target the credit card debt with the highest interest rate first. Make sure you close the credit card accounts subsequently.
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There are many like you in a similar situation due to family medical emergencies devastating their finances. I appreciate medical insurance is not used widely in some countries - instead residents in the UAE should be building up an ‘emergency fund’ for problems like these. You don’t even have to tell others about it.
You would have more options for a consolidation loan if you earned Dh8,000 per month, as this is the cut-off for a number of banks. Ask your employer for a raise or extra work, or seek employment at another company. Ideally the company should have a good relationship with the banks so they offer lower interest rates for employee loans.
Missed payments will indeed affect your credit score and can stay on your file for several years. The only thing you can do here is make sure you don’t miss any more and start paying off your cards to reduce the risk of defaulting on any future payments. You may want to focus on paying off cards 3 and 4, as they have relatively small amounts – though you cannot afford to miss a payment on your main credit card while doing this.
Keep trying to get a consolidation loan and especially try to develop a relationship with bank 1. Go to them with a clear plan for how you can pay off your debt, showing stability of income and determination not to miss payments. Try to talk to as senior a person as possible.
Do not keep spending on your credit cards. Ideally hide them away so you cannot use them easily. Meanwhile, you need to maximise the amount you can pay off each month, as the high interest rates will make your debt grow rapidly. See if you can get a cheap or free loan from another family member so you can pay off a bigger chunk of your card debt, or ask your employer for a loan or salary advance.
Reduce your expenses as much as you can. Even if you have to live extremely frugally for a year, it will be worth it to get out of debt and start again. Rent, transport, food and drink, gym, phone, gadgets, remittances – these are all areas of spending you should examine in detail and slash as far as possible until you have your card debt under control.
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 email@example.com