“I can’t afford to pay my credit card bill this month”
I was recently inundated with calls from my credit card provider, offering me a higher limit on my card.
Although I initially ignored the calls and the unsolicited credit limit increase, I was tempted by the offer and eventually accepted it.
I went on a spending spree to take advantage of the higher credit limit on my card. My new card limit is Dh50,000 ($13,614), an increase from Dh30,000.
Previously, I was guilty of only paying the minimum amount on my credit card balance, which affected my credit rating.
Even though I jumped on the offer and gave in to the temptation to spend, I now feel guilty and worried because I don’t know how to repay the debt.
This month, my credit card bill is almost 20,000 Dh, while my monthly salary is only 12,000 Dh. I don’t know how to pay my credit card balance.
Shouldn’t banks be more careful about who they offer higher credit limits to? Do they not do their due diligence and have access to my credit rating with the Al Etihad credit bureau?
Going forward, what factors should I consider before accepting a higher credit limit from a lender—and how can I pay off my current balance? PB, Dubai
Debt Speaker 1: R Sivaram, Executive Vice President and Head of Retail Banking Products at Emirates NBD
It is very important for you to take stock not only of your current financial situation, but also of your life choices.
If your credit card spending is out of control, monthly payments and accrued interest can also increase and lead to potential financial problems if you fail to pay off the card each month.
A bank would normally look at your income, credit score, and customer history before deciding to offer you a credit limit increase.
A bank can also do this if you are a good customer who pays your bills on time and uses the card responsibly.
If I understood correctly, the bank asked for your consent before increasing your credit limit.
You had a choice to accept it and get a higher limit or decline it and keep your limit where it was. Depending on their needs, some customers choose to accept such an increase, while others refuse it.
This should be done taking into account your future spending needs, your ability to repay, and your ability to save for yourself in addition to your credit card repayments.
However, if your debt is weighing you down, a credit limit increase may not be in your best interest. If you live paycheck to paycheck and use the credit to cover day-to-day expenses, a higher limit means you’ll take on more debt.
One thing you can do right away is talk to your bank and share all the details of your financial situation.
Based on your proactive approach, your bank might be willing to look into the situation and possibly consolidate your outstanding debt into an installment plan or personal loan with a lower interest rate and longer payment term.
Ideally, you should be looking for a low monthly repayment over a longer period, which will give you flexibility while hopefully avoiding having to borrow again.
When approaching your bank for a loan consolidation, you need to have a clear plan detailing your income and expenses – this will help you be clear about how you propose to repay your loans and get out of debt.
It’s also important to work out a budget plan and set a monthly limit on your discretionary spending outside of essentials like groceries, utilities, tuition, and the like. Try to get into the habit of setting aside a percentage of your income as savings to help out on “rainy days”.
Debt 2 Panelist: Jaya Ratnani, Managing Partner at Freed Financial Services
It is important that you understand how to use a financial product responsibly, as it can lead to unwanted repercussions.
Your debt ratio is a factor used by banks in the UAE to calculate your eligibility.
The central bank says your DBR ratio cannot exceed 50%. When approving credit cards, only 5% of the credit limit is taken into account to calculate your DBR.
So, if your salary is 12,000 Dh and you have no other loans, the bank has provided you with a limit of 50,000 Dh. This means that the minimum payment will be 2,500 Dh per month, which is within approved standards.
Paying only the minimum amount each month is a common practice for many cardholders.
However, keep in mind that this can also lead to continued debt growth due to compound interest. This leads to the threat of falling into a spiral of debt.
One option would be to take out a personal loan from the bank where your salary is transferred and use the funds to pay off the credit card in full.
A loan will carry a much lower interest rate than your credit card. If you’re worried about monthly payments, you can apply for a term extension and reduce the payments to an amount you can afford.
I recommend that you cancel the credit card immediately or make sure to reduce the limit to an amount you only need in an emergency.
It’s also a good idea to manage your expenses and budget to make sure you can allocate enough to pay your monthly payments.
Debt 3 Panelist: Alison Soltani, Founder of Leap savvy savers
Credit cards can serve as useful financial tools when used wisely. Problems arise when we overspend and are unable to repay the balance.
Interest, which averages over 30% per year on credit card balances and accrues daily, and late fees can sometimes mean that the balance continues to grow despite efforts to repay it.
It’s true that banks use your credit score and income to assess your credit eligibility and determine your credit limit.
However, it should be noted that credit cards are a product offered by banks to accumulate profits – your debt will increase their income, so they are motivated to increase credit limits for customers.
To meet your current bill, first calculate your savings rate, which is your total income minus your monthly expenses.
This gives you an idea of how much disposable income you need to spend on debt.
Make a plan to pay off the debt using an online debt repayment calculator. You will need your interest rate and balance and you can insert monthly contributions. The calculator will calculate the number of months it will take you to pay off the balance.
If your savings rate is low, write down all your expenses and categorize them into “needs” and “wants”.
Starting with the list of wants, decide which expenses you can cut or reduce while paying off the debt.
You can try a savings challenge or a no-spend challenge to motivate you to reduce your spending. Avoid using a credit card while paying off your debt.
For the future, build an emergency fund of at least three to six months of expenses.
This can be kept in a separate savings account and used for emergencies.
If you’re starting to use a credit card again, you can try paying it off weekly and setting a spending limit for yourself each month.
Track your spending and once you’ve reached your limit, lock your card up or give it to a trusted friend or partner to keep safe until the next statement period begins .
You can start saving money each month in an account and call it “play money”.
This is the account you can dip into without guilt when you feel the temptation to spend money. Having savings keeps you from going into debt when the opportunity to spend extra money arises.
Finally, consider the circumstances that led you to spend too much in the first place.
Common spending triggers include emotions such as boredom, stress, happiness, guilt, a coping mechanism for certain life events, or a childhood experience with money.
Finding more effective ways to address the root cause of triggers can help reduce impulse spending in the long run.
The Debt Panel is a weekly column to help readers manage their debts more effectively. If you have a question for the panel, write to [email protected]
Updated: November 16, 2022, 5:00 a.m.