Too many in UAE face personal debt red zone

Money experts reveal the signs UAE residents need to look for to indentify whether or not their finances are in trouble.

The Debt Panel says UAE individuals fail to recognise the tell tale signs that they have dangerously over-extended themselves

With many in the UAE struggling to meet their debt obligations, money experts say residents must learn to identify when they are in the “financial red zone” to help prevent problems further down the line.

Having no savings and no emergency fund means you are definitely in the “financial danger zone”, says Ambareen Musa, the founder and chief executive of Souqalmal.com.

Another obvious sign you are in trouble, she says, is to calculate your debt burden ratio, which is how much of your monthly income goes towards repaying debt. This figure is also used by banks to help assess a potential customer’s credit worthiness.

If your ratio is 50 per cent – the maximum for individuals - you are in trouble, says Ms Musa, also a panellist for The National’s The Debt Panel, an online column offering advice to residents in chronic debt.

“This high debt dependency will not only leave you vulnerable to unforeseen financial emergencies, but will also negatively affect your credit report and bring down your credit score.”

The “red zone” warning comes just over a week after The Debt Panel members met for a round-table conference to mark the column’s first-year anniversary and discuss how its advisers have helped those in dire financial straits by easing the stigma surrounding personal indebtedness. However, Michael Routledge, the founder of savememoney.ae, suggests those in debt should start worrying long before their debt burden ratio reaches the 50 per cent mark.

“Before 50 per cent you are heading towards an issue,” he says. “If you are getting between 30 per cent and 40 per cent it is time to start looking at what you are borrowing and don’t borrow any more. Don’t consolidate. Pay down what you have got.”

Having an outstanding balance on three or more credit cards is another big warning sign, says Rasheda Khatun Khan, a wealth and wellness planner and another panellist for The Debt Panel. It does not even matter how much is on the cards; having a third card suggests that you have not been able to pay off the first two you took out and you have likely maxed out at least one of them, she says.

Depending on a credit card to pay for your general living expenses should sound the alarms too if you do not pay it off in full each month, says Ms Musa.

“If paying with your credit card is your only option then that’s something to worry about. You need to take a serious look at your spending patterns, as well as your living situation. Could you be renting a more affordable accommodation, driving a cheaper car and cutting back on unnecessary expenses?” she adds.

And if you are only making the minimum payments on your cards, consider it another warning sign, says Ms Musa. Recent analysis by Souqalmal revealed it will take more than a decade to pay off an outstanding balance of Dh10,000, and you will end up paying 2.7 times the original balance if you pay just 5 per cent a month.

Both Ms Musa and Ms Khatun Khan say taking on more debt to pay an existing one is a big signal something is amiss.

“Instead of taking out another personal loan or applying for another credit card, focus all your financial resources on repaying what you already owe. You could follow either of these two popular debt repayment strategies: debt stacking (paying off the debt with the highest interest rate first) or debt snowball (paying off the smallest outstanding debt first),” says Ms Musa.

Chances are you are living from paycheque to paycheque and you need to work on creating a budget, she says, adding that you should also set up an automatic transfer from your current account to a separate savings account.

Expenses come up sometimes, but if you cannot catch up three months later, you have a problem, warns Ms Khatun Khan.

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