<em>I owe Dh48,000 on a credit card, as I am struggling to repay a home loan in India and support my family. I bought a property five years ago when both my brothers were here to help me repay the mortgage in India as well as finance other expenses back home. However, in 2016 my older brother went home and in 2017 my other sibling also left due to his health. Now I have to repay the home loan alone and support them all. Because I was struggling, I relied more on the credit card and the outstanding balance grew and grew. I earn Dh5,500 a month as a receptionist and have only been paying the minimum on the card for four years.</em> <em>This year I contacted my bank to find out if they can convert my credit card to a loan. Their first offer was 39.99 per cent for four years. I begged them to reduce it and the final offer was 34 per cent for two years, which is over Dh2,700 a month. I was told I couldn’t secure a lower interest rate because my salary is low. Is this a reasonable rate for a consolidation product?</em> <em>I have tried to reduce my expenses to help me repay the debt. I cut my mother’s allowance in half so she is now surviving on Dh500 a month with Dh300 of that going to bills. Sometimes when there is an emergency, like when my grandmother died last year, I borrow from a friend or use my credit card to buy food. </em> <em>As well as the Dh48,000, I also owe my friend Dh7,000. My monthly expenses come to Dh5,410 and include: home loan in India Dh1,250; rent in the UAE Dh800; remittances Dh500; transport Dh200; food Dh260 and Dh2,400 a month for the credit card debt. What do you suggest? </em><strong>FF, Abu Dhabi </strong> Asking your bank to consolidate your credit card debt into a loan was the right thing to do. Credit cards are beneficial tools when used properly. However, in your case it seems that too much was borrowed on the card for too long. Moreover, due to all the pressures on your income, you have been able to pay off little more than the monthly interest, leaving the underlying debt untouched. This is a perilous long-term cycle. With the right terms, consolidating the credit card debt into a loan will be a good thing for you because you can start to focus on repaying the debt rather than just credit card interest. Indeed, the Dh2,700 monthly loan repayment you mention isn’t a huge amount more than the Dh2,400 you are paying towards your credit card currently — and depending on the rate you settle on, the monthly repayment may be even less than your current liability. Are the rates you have been offered reasonable? As always, you should compare the options presented by a spread of banks. But it seems to me that 34 per cent over two years (or 39.99 per cent over four years) are not good rates. The criteria determining any rates you are offered will include your credit history, whether you work with a listed employer, and whether you meet the bank’s salary threshold. If you satisfy these criteria, I expect you can find significantly lower rates elsewhere. Whichever rate you settle on, you will benefit from more discipline in your future expenditure. You have taken good steps in that direction already, and I suggest exploring other ways of relieving the pressure. For example, can either of your siblings now help repay the home loan (or support themselves)? And can the Dh7,000 loan you owe your friend be deferred until you have dealt with the more immediate issue of the bank loan? Doing what it takes to repay your credit card/bank debt as soon as possible will help you and your family and put you on a surer footing for the long term. Credit cards may seem like a quick fix in the short term, but stacking debt on your credit card is the worst move in the long run. You've been treating your credit card like a personal loan, and here's why that's a dangerous bet: the extremely high interest rates on credit cards make them a poor choice for long-term financing. With interest compounding every month, your original outstanding balance will expand really quickly. Your outstanding card debt is around nine times your monthly salary. And this debt will keep growing the longer it is left unpaid. Now coming to the 'consolidation' offer you've written about. This isn't really a consolidation since you're not combining two or more debts. What you're looking for is a way to 'restructure' your credit card debt. Essentially, this will help convert your credit card debt into a fixed-interest, fixed-tenure loan, that you can then repay just as you would a personal loan. Your card provider is willing to convert your outstanding balance into a fixed-interest loan at a rate of 34 per cent for two years. While we wouldn't say that rate is low, it is significantly better than the average Annual Percentage Rates (converted based on monthly interest rate) on credit cards in the UAE, which are close to 40 per cent per year. Under the restructured arrangement, you'll be spending a lot less on interest. Plus, the fixed repayment timeline will help you stay focused on the task at hand. But before you go down this road, try your best to explore other ways to repay the debt. Can you tap into any old savings or sell any assets to come up with the cash to partially offset the debt? If you've exhausted all personal means, you could also take advice from a debt management or debt counselling company that can negotiate with the bank on your behalf. They may be able to secure a deal with better repayment terms. Unexpected emergencies are always stressful, especially when they involve health and family. The emotional stress can take its toll and when this also affects you financially, it can be hard to see the light at the end of the tunnel. One of the first rules of taking care of your finances is to have an emergency fund to ensure unexpected events can be taken care of. So, before you even consider investing — whether it's property, land or shares — build an emergency cash fund first, otherwise debt becomes inevitable. Even in your current situation, start a buffer now. Other unexpected costs will still crop up and you have to be in a position to handle it. Take this into account when you look at your budget to repay your credit card, as it will need to be as low as possible to help you build the emergency fund. Looking at the interest rates offered, it appears the bank is simply reducing your interest rate. Approach the lender again and share your full income and expenses. Show them the amount you can afford to pay monthly and ask them what their final offer is. Usually a bank can put your outstanding balance on a repayment plan or actually transfer it to a personal loan. Also look at other banks in case they can offer you a more affordable option. Lastly consider selling or releasing equity from the property you have purchased to reduce your debt. Ask your family for support. Are your brothers now in a position to contribute? If you have any other assets, consider selling. Just make sure whatever repayment you commit to allows you to also build that essential emergency fund. <em>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 pf@thenational.ae</em>
