I owe Dh50,000 on two credit cards - Dh28,000 on one card and Dh22,000 on the other. I earn Dh4,750 (with the housing paid six months in advance) working in the shipping industry in Dubai but I have not made the minimum payments on the cards for the last three months due to health issues in my family. I built up the debt because my father had open-heart surgery and I still need money after the operation for his medicine and regular check ups. My aunt has also been unwell. I also used to shop for friends on the card and they would give me cash. I always paid the minimum balance, until recently, but despite paying that the interest gets added every time. One of the banks told me they would put a travel ban on me – can they do that?
My expenses are:
Credit card minimum payments Dh2,700
Rent: Dh900
Transport: Dh200
Groceries / general expenses: Dh200
Total: Dh4,000
I would like a loan of Dh50,000 to clear my debt and am concerned about the potential travel ban. What do you suggest? RA, Dubai
Debt panellist 1: Philip King, the head of retail banking at Abu Dhabi Islamic Bank
Unfortunately, your case is a very common fault of financial mismanagement in which you have built up significant debt using cards and then only pay off the minimum amount due each month. You will therefore be paying a large rate on the outstanding balance without making any significant headway in terms of clearing the total debt. The annual percentage rate (APR) on each card will be much higher than the rate paid on any loan facility, which should always be preferred to cards if there is a need to borrow from a bank.
In addition, we strongly recommend not using your card to support others, which appears to be the primary cause of your current predicament. Your friends should be using their own cash for shopping instead of relying on your card, as should you. There's no need to incur card charges on items that should be paid directly from your monthly income. We recommend that customers pay off the entire balance of their card every month when they can.
In your situation, with outstanding debt of Dh50,000 and monthly earnings of Dh4,750, you are eligible for a loan of over Dh50,000, which is within UAE central bank regulations of lending up to 20 times an individual’s salary. Speak to your bank about securing a loan to pay off your card debt. This will enable you to structure your repayments in a more sustainable manner and regain control of your finances. Make sure to cancel all cards once you pay them off and budget your expenses and live within your means.
Banks are not in a position to enforce a travel ban, although to manage risk, they may be reluctant to lend if they fear that you will flee the country with significant debt. If justified, and usually in extreme circumstances, banks may file a police report requesting a travel restriction, although this is rare. When speaking to your bank, you should therefore explain your commitment to clearing your debt through a considered repayment plan while remaining in the UAE. Your employer may be able to support this testimony.
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Debt panellist 2: Keren Bobker, an independent financial adviser with Holborn Assets
There are a few issues to address here. If someone does not make the contractual repayments on a debt agreement, whether a personal loan or a credit card, the bank has the right to take action. After three months of missed payments, a police case can be registered and this will also lead to a travel ban. This is to stop someone leaving the country without paying what is owed.
Interest will always be added to a credit card debt that is not paid in full each month and cards have always been set up on that basis. If money is owed, interest is payable. This is also clearly stated in the Terms and Conditions that RA would have signed when taking out the card, so I am surprised he thinks being charged interest when he has only made the minimum payment is somehow wrong.
Only making the minimum payment each month does little more than pay off the interest accrued on the debt over the previous month, so it is important to pay more than the minimum to actually reduce the capital outstanding and the total owed. Without doing that, a credit card debt will never be repaid. Some banks will also charge an additional payment for missing payments and, if this is stated in their terms, they are within their rights to do so.
The level of credit card debt that RA has built up is far more than he should be carrying based on his income, although I appreciate that some money was borrowed for family reasons.
Given that the debt is on two credit cards, both of which will have high rates of interest, if may be possible to take out a personal loan to repay them in full and reduce the monthly outgoings. The interest rates on personal loans are lower than on credit cards so the combination of the lower interest rate and the fact that the loan is repaid over time may be a solution to the current issue. RA must then ensure that the cards are fully cancelled once they have been settled and that he does not borrow any more money to avoid further difficulties.
The Central Bank of the UAE has a strict Debt Burden Ratio, the percentage of income that may be used to service any debt, and this is set at 50 per cent of earnings. This means that for RA, the total repayments on any debt should not exceed Dh2,375 per month and that should easily be the case here if he converts his debts to a loan.
I suggest he contacts his own bank about converting the debt to a loan and he also needs to speak to both card providers to advise of his intention before they take any further action for non-payment. Once the credit cards have been repaid in full, the travel ban can be lifted.
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Debt panellist 3: Rasheda Khatun Khan, a wealth and wellness planner
Credit card debt seems to creep up on you, or does it? Taking cash advances from your credit card is the most costly form of borrowing. If you don't know how to repay the money you are borrowing, then of course you will reach a stage where you cannot even make the minimum repayment. This does not just creep up on you; being aware of the financial choices you make are critical.
Many of us have family responsibilities and take care of other dependents. This is fine if you have the money, but if you don't, then you need to learn to say 'no'? If you say 'yes' to paying your aunt's medical bills, then you are also saying 'no' to your own wellbeing. Unpaid debt over a period of time could land you with a prison sentence and then you will be unable to help anyone at all. The cycle has to stop. Take control of your own situation first before you help others, otherwise you compromise your own life and worse, your family's life.
Before you consolidate your debt, you must restructure your monthly expenses. Include a budget for emergency expenses because these come every month and they are always a surprise. Ultimately though, the only surprising thing about these expenses should be what they are actually for. If you don't put money aside, you will always fall into debt simply because you leave no room for those unexpected expenses. Next go to your assets. If you have any assets, then sell them. Reduce your debt as much as you can by repaying as much as possible. You are paying far more interest on these credit cards than you are making on any asset.
Once you have done this, seek a consolidation loan. Firstly try the bank of the larger credit card is with and ask to have it restructured as a loan. Ensure the monthly repayment is affordable and within your means. Ask the bank if they would take on the other credit card balance also. If they are unable to, approach the second credit card company for a restructure. It's time to make better choices.
On this panel this week: Philip King, the head of retail banking at Abu Dhabi Islamic Bank; Keren Bobker, an independent financial adviser with Holborn Assets and Rasheda Khatun Khan, a wealth and wellness planner and founder of Design Your Life
The Debt Panel is a weekly online column to help readers tackle their debts more effectively. If you have a question for the panel, write to pf@thenational.ae
