I work as an engineer in Abu Dhabi earning Dh9,000 a month. I have three debts after borrowing money to do some maintenance work on my house and pay for my wedding. Everything was going smoothly until 18 months ago when my mother became ill back home in India, leaving me with sudden financial issues. This was when all my bank payments became messed up. My debts are:
Personal loan: Dh109,000 (monthly payment is Dh4,080)
Credit card 1: Dh14,000 (this is Dh1,000 under the limit and I still use this card)
Credit card 2: Dh20,000 (this is Dh10,000 over the limit)
Total: Dh143,000
My payments on the loan and card 1 are regular because they are both from the bank where my salary gets transferred. But for credit card 2, I am only able to make the minimum payment and it is not making any change to the debt. I tried to top up my loan but I cannot because my credit score with the Al Etihad Credit Bureau is low. If I get a top up or consolidation, I am sure I can get myself out of this. I have worked for the same company for 10 years and my personal expenses outside the debt repayments are approximately Dh1,000 a month. KT, Abu Dhabi
Debt panellist 1: Shaker Zainal, head of retail banking at CBI bank
What you are facing is a short-term financial distress caused by a sudden unexpected expense, which in your case was your mother’s illness. I hope she is better now. Your first priority should be to bring your credit card payments under control to avoid more late payment charges and interest.
You can approach the bank, where your salary is credited and ask them to restructure your personal loan, based on the fact you have been a good borrower with a healthy track record historically. This can be achieved by increasing the tenure of your personal loan, which will allow you to reduce your monthly instalment payments. Your bank is likely to take into account your 10 years of continuous employment with your current employer as a positive factor. However, you may be asked to provide them proof of your medical expenses incurred for your mother.
Most banks value long-term relationships with their customers and understand extraordinary circumstances caused by an unexpected event, particularly if the customer has a strong track record in the past. From your bank’s perspective, one of the most positive aspects of your application would be the fact that your salary is paid to an account with them. It should provide them with some level of comfort that you will respect and discharge your financial obligations to them.
For your other credit card, for which you will not be able to secure a top-up loan due to your low credit bureau score, I suggest you find another external source of funding to bring your card outstanding down to the limit (or less, if possible). It will help you reduce your monthly instalments and charges associated with excess limit usage. You can then gradually clear it out.
It would be prudent to inform your employer about your temporary financial distress and perhaps request a salary advance or small-term loan as a source of funding. You have not mentioned whether your spouse is working and if possible, your spouse’s salary or income may also be utilised to reduce your debt burden.
Finally, if you have any assets you can sell to help with your finances, consider this as an option to provide some relief.
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Debt panellist 2: Ambareen Musa, founder and chief executive of Souqalmal.com
A loan top-up is not a possibility in your case, not only because of your deteriorating credit score, but also because your debt-to-income Ratio or Debt Burden Ratio (DBR) is already over 50 per cent, ie more than half of your monthly salary is going towards debt repayment. It is time to curb your debt outlay by prioritising and getting rid of the most expensive debt first.
Before giving debt consolidation a try, you must rein in your outstanding balance on credit card 2. Not only are you draining your income in hefty interest payments by repaying the minimum every month, you are also incurring an over-limit fee by spending beyond your authorised credit limit. Over-limit fees range between Dh200 to Dh300 across most credit card providers. But it will also have a negative impact on your credit score. Therefore, focus on bringing down your credit card balance so it stays within the credit limit.
Next, tackle the issue of debt consolidation. Since one of your credit cards and the personal loan are from your primary bank, you must approach them to check if they offer such a facility. The ideal scenario would see the bank agree to combine all three of your debts into one consolidated loan at a lower interest rate and extended tenure. But if this is more than the bank is willing to offer, be prepared to negotiate and convince them to consolidate just the two debts you owe to them.
Also, since you have been working for your current employer for a decade, reach out to them for some financial assistance and request an interest-free loan or a few months' salary in advance. Any financial aid, be it from your employer or relatives, must go towards paying down the credit card debt. After all, you have already noticed first-hand how minimum payments barely make a dent in your outstanding credit card debt. The sooner you pay it all off, the less financial damage you will have to sustain.
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Read more:
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Debt panellist 3: Rasheda Khatun Khan, a wealth and wellness planner and founder of Design Your Life
We are facing two issues here: firstly, the financial burden of family emergencies, and, secondly, the cycle of debt consolidation loans. It is inevitable that at some point banks will stop lending you money, especially if you unable to keep up with commitments.
As simple as the following statement is, it is imperative you understand it: if you do not have the money for something, then you cannot afford it. This means if you choose to pay for something you cannot afford, there will be negative financial consequences.
We all have emergencies beyond our control and life often spits out situations that need to be dealt with immediately; nobody is exempt from this. But building and retaining an emergency fund is crucial. All of us want to help our families when the need arises, therefore using your credit card as an emergency fund will always get you into trouble. Don't set yourself up for failure, instead build an emergency pot.
With emergencies and unexpected costs coming up almost every month, those without a plan for this will soon find themselves in debt. If your spending decisions remain unchanged, your debt will become bigger and bigger. So the first thing that needs to change is how you allocate your money.
Learning to say 'no' to things you cannot afford is key. Family medical situations are really difficult but look for a compromise. If you say 'yes' to every family crisis, what are the consequences for you? Your own medical emergency? Having to send your family home because you cannot afford to keep them here? Loss of job because of the stress?
You have to make wiser choices. Also find a way to stop using card 1; if you don't give it up, you will not be able to get yourself out of debt.
So, what's the next step from here? Do an affordability check and see what amount you can comfortably afford to pay towards all of your debts. Then, approach you main bank and request a loan restructure. Perhaps you can extend the tenure of the loan to bring down the monthly commitment and use the reduction towards your credit card.
Also, review your expenses to see what you cannot afford to do anymore and find ways to cut back. Consider releasing money from the home you own; could you even take out a secured loan on it? Perhaps your company can give you an advance. Also brainstorm ways to increase your income and start building an emergency fund today as the unexpected costs will never stop.
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
