I have a loan and five credit cards with my debts totalling Dh105,000; I pay back around Dh8,000 in debt every month. While my salary for my customer service job is Dh5,000, I also have a side business that generates around Dh9,000 a month but I'm not receiving any of the benefits as it is all going on debt. I accumulated all of these debts after taking money from my credit cards to start a business back in my home country of Tunisia. I have tried to get a loan to consolidate all of the debts and make it one payment but no banks have agreed to give it to me. What should I do? WM, Dubai
Debt panellist 1: Philip King, head of retail banking, UAE for ADIB
The customer should seek to consolidate his debt into one plan, with one payment.
As a general rule cards should never be used to finance a business or any assets. The rates are very high on cards and thus they are meant to be used for everyday purchases as an alternative to cash. They should be paid immediately.
Our advice for this customer is that he bring proof of the extra income he is earning to his bank. With this proof his bank will be able to work on consolidating all his debt into one plan with lower rates and lower instalments.
If he is unable to provide proof of extra income, he should approach the collections department in the bank, or talk to his bank to negotiate a new settlement. Whatever happens, he should absolutely avoid getting more finance or paying existing debts from his card.
Debt panellist 2: Rasheda Khatun Khan, a wealth and wellness planner
Doing a proper business plan is essential to building a successful business. Working out the actual cost of setting up, (this should include the cost of borrowing too) and maintaining the running costs for at least year one versus realistic potential revenue, will give you a clear indication whether you can make a good return. Remember just to cover costs is not enough, you may as well get a job and not have the worry of running a business.
Trouble emerges as soon as these numbers don’t add up. The most common mistake is not factoring the cost of borrowing money to set up the business. We have said it before and we will say it again, taking cash out of credit cards is not the solution. It is in fact the most expensive form of borrowing and yes soon enough your expenses are way more than your revenue leaving you to spiral downwards.
If you are already in this situation and unable to get a bank loan to consolidate your credit cards, you should try the snowball effect. Take on one credit card at a time. Start with the one with the least balance owing. Overpay as much as possible by diverting repayments to get this one paid fully. At the same time, pay the minimum on the others or nothing at all if possible for a few months just to get the other card paid off in full. Once you have done so, take on another card, again the one with the least balance owing and over pay as much as you can. By physically paying off one card in full leaves you more balance to divert to the next selected card and so on. Also seeing one card being paid off at a time is mentally rewarding.
Then apply for a bank loan again once your outstanding debt has need reduced somewhat. In the meantime revisit your household expenses. It’s time to cut right back. If you have assets you can sell or downsize then do so. See where you can release cash. Many of us have also accumulated so many unused goods at home, consider a spring clean and sell, sell, sell.
The Debt Panel brings together four financial experts: Philip King, the head of retail banking, UAE at Abu Dhabi Islamic Bank; Ambareen Musa, the founder and chief executive of the comparison website Souqalmal.com; Rasheda Khatun Khan, a wealth and wellness planner and founder of Design Your Life; and Keren Bobker, The National's On Your Side columnist and an independent financial adviser with Holborn Assets in Dubai. Together they answer queries in a weekly online column to help readers better tackle their debts. If you have a question for the panel, write to pf@thenational.ae.
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