Tightening the plastic strings

Many banks recently clawed credit card limits - yet another reason to practise debt diligence.

United Arab Emmirates - Abu Dhabi - Nov. 11 - 2008 : A woman, with two children, check a shop window at Abu Dhabi Mall. ( Jaime Puebla / The National ) *** Local Caption *** JP06 - ABU DHABI MALL.jpg
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Just in time for the holidays, a number of banks in the UAE last week slashed customers' credit card limits, sometimes by as much as 90 per cent. The global financial crisis has left the banks - especially the foreign banks - with less money to lend. And they're being very cautious as a result, pulling back on everything from car loans to credit limits. How can you prevent your credit limit from getting a haircut? The answer is simple, bankers say: be a responsible credit card user. As long as you pay your bills on time and don't run a high balance, you're not likely to have your limit reduced.

Thimal Perera, HSBC's regional head of credit cards, for instance, said the bank's recent actions on reducing credit limits has to do with cardholders' "payment patterns". The recent wave of credit card limit reductions has led to a ton of annoyance at the cash register. Not all customers were informed of reductions promptly, and many only caught wind of the changes when they went to pay for their purchases.

While that's not a fun way to learn you've had your charge card curbed, it might make for a good opportunity to review your relationship with credit. After all, no matter how you slice it, getting up to your ears in credit card debt is not a sound financial strategy. Interest rates on credit cards in the UAE also tend to be exorbitant. The lowest-interest cards in the UAE come from Union National Bank and Commercial Bank International and charge roughly 24 per cent per year. The highest-interest cards in the UAE come from Standard Chartered, which charges 2.99 per cent per month, or 42.41 per cent per year. If you run up a Dh10,000 charge at the beginning of the year, in other words, come next year you'll owe a whopping Dh14,241. That's Dh4,241 in interest just for the privilege of buying Dh10,000 worth of stuff.

If you have a pile of credit card debt and are pondering New Year's resolutions, none could be more prudent than reducing that burden. The best way to do that, experts say, is to come up with a practical plan - and sticking to it. Start by paying off the highest-interest card in your wallet and move on to lower-interest cards. You can do some easy back-of-the-envelope computing to come up with a sum you want to regularly put towards reducing your debt - one-tenth of it per month, for example. You can also use free online calculators like those at bankrate.com (click on the "credit cards" tab and look under the "calculators" heading) to strategise even more precisely.

You might think that Dh20,000 at 2.5 per cent a month is a lot to pay off. But if you're able to scrape together about Dh3,000 a month, it should only take you eight months to emerge debt free. Or so says bankrate.com's calculator. Hallie Engel, an American who lives in Abu Dhabi, believes people in debt should do what it takes to get themselves out of it. The27-year-old American moved here in order to free herself from the debt she incurred paying tuition bills.

"Being in debt is terrifying; you feel like you have no choices in your personal life regarding work and you really don't know what to do," she said. "And getting out of it is essentially going from being a slave to being free, it's the best feeling in the world. When you make money it is yours; you don't feel guilty if you get yourself a new pair of pants, you don't worry about feeding yourself. It just opens so many doors and you get your life back."

If you've missed a few credit card payments, paying on time is another solid resolution for next year. Banks make all kinds of lending decisions based on your payment records, and being late could affect your ability to buy a car, get a mortgage or take out a personal loan when you need it. The UAE lacks an established credit bureau (one called Emcredit in Dubai is still in its early phases), but that doesn't mean bad behaviour goes unpunished. You may be able to slip through the cracks by switching banks, but you'll be doing yourself a favour - and saving yourself the hassle - if you merely act like a good customer and get your payments in on time.

By staying in good stead with your bank, you'll also make credit limit reductions far less probable. That, in turn, should lead to more peace of mind at the cash register.

*Pay your bill on time. You'd be surprised how important this simple act is. When your payment does not arrive on schedule banks get nervous and you are perceived as a risky consumer. Multiple late payments lands you on the black list with your bank. *Know and check your credit limit. Unsure about any changes, call the bank. *Have more than one credit card so you never go over your credit limit. *Pay off your balances as quickly as possible; the balance is costing you money every single day. *Check your interest rates and keep up with any changes. *If your rates are too high, shop around and see if you can transfer your balance to a card with a lower rate. *If you have a rewards card, keep track of your points and find out how and when you can redeem them. *Never use your credit card at a merchant who security precautions you don't trust, especially online. *Don't forget cash. Think twice before you pull out your credit card; if you can pay for the purchase with currency, you will be better off in the long run. afitch@thenational.ae michael.jalili@admedia.ae