How to use credit cards without falling into the debt trap
The pandemic has led UAE residents to consider increasing their money supply, and credit cards, with ease of use and immediate liquidity, have helped them gain temporary purchasing power. Contactless payments have exploded and most of them are made via credit cards.
According to Carol Glynn, finance coach and chartered accountant at Dubai-based Conscious Finance Coaching, the need for multiple cards was not created because of increased online shopping, but because of overspending.
“People have multiple cards to use various discount, cashback or point systems. Others did it because they maxed out the ones they had and took out new ones to use more credit. This happens when they are already living paycheck to paycheck and beyond their means. And some also see it as a status symbol and a sign of wealth,” Glynn said.
“While many people have the discipline to pay their credit card bills on time, problems arise when people lose income or have their income reduced and don’t have emergency funds or savings for them. sustain.”
“A minority use them to create a lifestyle beyond their means. For others, it’s the consequence of not paying their credit card bills in full. They mistakenly believe that paying the minimum balance protects them from penalties and interest.
Damodhar Mata, principal consultant at Nexus Insurance Brokers, said having many cards in your wallet makes it hard to curb the urge for instant gratification. They make people feel richer and end up buying things they wouldn’t buy otherwise.
“It’s not easy to track expenses when you have more than two cards, especially if you don’t have an efficient system and don’t plan to record and track expenses. These people tend to break their budget (if they have one) more often and risk putting them in a debt trap.
Khetra Reddy, senior wealth planner at Elixir Wealth Solutions, said the problem arises when people don’t use the lowest limit card for regular use and spend more in anticipation of future income.
“Many of my clients spend at least 20% of their monthly income on credit card payments, which forces them to live check to check. They fail to increase their savings and reduce their liability.
Another mistake is rolling over the credit card and being charged 36% interest, which is the highest interest, Reddy said.
“People often forget that if they continue to pay the minimum amount on their card, it takes 14 to 24 years to pay off their outstanding amount, depending on their card limit – a higher limit takes more years to clear. erased.”
Loss of employment or reduction in income further increases the debt burden.
Maintain debt control
Reddy advised people to avoid high-value credit card transactions to prevent their monthly budget from being compromised. “I encourage people to create an emergency fund for themselves, basically 6-12 months of their monthly salary/income.”
“And if they’re already rolling over the credit, going through the ‘debt stacking’ process for a year will help them eliminate their liability to a large extent.” Debt stacking is a process in which the lowest outstanding amount must be paid first and the minimum payment on other cards.
A simple way to reduce the highest outstanding amount on the card is to pay off as much as possible. “If the amount owed by the credit card is Dh50,000 and the income is Dh10,000 per month, and the person pays 10% each month, i.e. Dh5,000, the balance will be settled in about seven years. .”
He also suggested taking personal finance to pay the full bill due.
Here, Mata added that very few cardholders know that banks in the UAE charge 36-45% a year in interest on credit cards. “That’s at least 10 times that of a mortgage and 3 to 7 times that of a personal loan.”
“A person with a salary of 15,000 Dh and an outstanding balance of 75,000 Dh on four cards, Card 1 – 20,000 Dh, Card 2 – 18,000 Dh, Card 3 – 12,000 Dh and Card 4 – 25,000 Dh, would mean a total minimum payment on all cards is Dh3,750. If they only pay the minimum due, it could take decades to repay them.
Use the cards to your advantage
Credit card overspending and the debt trap is a common concern for many card users in the UAE.
However, Praveen Mehta, a longtime resident of Dubai, CA, founder of a management consultancy and real estate investor, said he uses a credit card as a convenient method of payment rather than viewing it as power. additional purchase which turned out to be very rewarding.
He showed how he used the credit card for 24 years to his advantage:
1. I don’t take a credit card limit higher than my monthly salary. If I take more credit cards due to different benefits, I reduce the limits accordingly so that the total limit on all cards does not exceed my monthly salary.
2. I always link my credit card to my salary account with 100% automatic payment.
3. I use my card for all payments and therefore my high spend earns me bonus points and related benefits.
4. As a big digital consumer, I get cash back, offers and vouchers from my points, and over the past 24 years the value of all of this is more than the value of a studio in Dubai .