When used responsibly, credit cards are a great way to earn free flights or get discounts on your purchases. However, with spending limits in excess of your monthly salary, maxing out a card over a new high-fashion wardrobe is very easy. Paying it all off is where you get into trouble.
Consumers in the GCC owed $6.6 billion (about Dh24.2 billion) in outstanding credit-card debt, according to last year’s statistics from Lafferty Group, a UK-based research and advisory firm. Per capita debt on each of the region’s 7.9 million credit cards was $8,361.
In fact, a poll by Kuwait newspaper Arab Times found that 20 per cent of responders, the largest chunk of those polled, felt credit cards lead to accumulation of unbearable debt.
However, Dave Ramsey, American financial coach and author of The Total Money Makeover, says anyone can become debt-free. “True debt reduction is plain common sense and hard work,” he writes. It won’t happen overnight but following some common-sense tips help with paying off credit-card debts.
The first step to breaking a bad habit is to recognise its hold over you. Many people live in denial, refusing to face their problems, perhaps because of the gargantuan size of their debts or because they are too embarrassed to ask for help. However, non-payment of dues could have disastrous consequences as the bank might make a police complaint.
With the help of a financial advisor, recognise where you are with your debt. Make a list of all your credit cards and loans and what the monthly payment on each one is, the current interest rate on each and when the payments are due. Add this up to get an idea of the total monthly minimum.
Paying this amount will avoid unpleasant calls from the bank but you will need to pay a significant amount more (at least the same amount as your monthly minimum) to reduce your entire debt bill.
Banks in the UAE charge an average annual interest rate of between 29.88 per cent and 35.88 per cent on credit cards, according to a survey by Xpress newspaper. These are among the highest rates in the world and can be disastrous for those in debt when compounded.
Consider a bill of Dh4,300. The minimum payment due is Dh129 and interest rate is 2.99 per cent. By paying only the minimum amount and not adding any new purchases, the debt will be cleared in 194 months, as computed using a calculator at the www.moneycamel.com website. Interest alone in this time would be Dh20,679. Triple your monthly payment to Dh387 and you would clear the debt in 14 months at total interest of Dh1,005.
Ignoring phone calls from the bank is the shortest route to a police case. Some banks may reduce total dues by 30 per cent if you can pay the entire amount in one settlement.
Be firm with the bank and try talking to someone senior who can make a decision. Ask them to freeze the interest.
In its debt management guide, MasterCard suggests prioritising your debts according to the annual interest rate. “To minimise the amount of interest you pay, concentrate on paying off the debts that carry the highest interest rates first. Keep all your accounts current by paying at least the monthly minimum due on each one,” the guide says. “Focus the additional amount you are able to pay each month on paying off the highest interest rate debts.”
When less of your money goes to paying interest on your debt and more of it goes towards paying off the actual debt, you will reach your debt reduction goal sooner.
Achieving small goals leads to meeting big ones and some advisors say paying down smaller bills first creates a positive psychological effect that helps with larger ones.
With this method, called a debt snowball, extra cash is dedicated to paying debts with the smallest amount owed. As each smaller debt is repaid in full, the money used to pay that debt is then applied toward making additional payments on the next-smallest debt and so on until all debts are repaid.
Credit cards are the most expensive form of loans, so many advisors suggest transferring all outstandings to the card with the lowest interest rate or even taking a personal loan to pay all the bills off. Some banks even offer zero-per cent balance transfers with low EMIs for a fixed period. Enquire with your bank or ask a financial advisor for help.
Consolidating helps track the payments due and a lower interest rate means you pay less over time.
Cut up and throw away all your old cards and refuse all offers for new cards. Pay cash for all new expenses. If you must make electronic payments, use your debit card instead. This prevents new charges from being incurred and ensures you don’t add to your loan burden.
Ramsey quotes a study of credit-card use at McDonald’s, which found that people spent 47 per cent more when using credit instead of cash. When you pay cash, he writes, you can feel the money leaving you, but flipping a credit card up on a counter registers nothing emotionally.
Author JoAnneh Nagler writes in her book The Debt-Free Spending Plan that we get into debt for one simple reason — we have no spending plan.
The simplest plan one can devise is to itemise all monthly outgoings, including coffee and lunch bills. Then add other expenses such as school fees and car insurance. If the total is beyond your monthly income, you need to look at where you can make small savings.
Canadian blogger Rachel, who writes on Little Lamb Wants to Be Debt-Free, explains how she paid her debt off. Rachel, who only goes by one page, created a budget in a simple Excel spreadsheet to record all her expenses. Guesstimates don’t work, she says. If you think you spend $200 in groceries a month but you really spend $400 that money has to come from somewhere.
Pat yourself on the back when you meet a target. Rewards are not always material so you don’t have to spend more money. One woman who got out of debt successfully explains how she cut off a piece of the credit card as she made a payment. The feeling of achievement, she says, prompted her to keep going.
The following questions, provided by Visa, will help you determine if you are in debt. If you answer yes to two or more, you have a problem.
• Next month’s bills are here before you’ve paid the last one.
• You get frustrated when you start to write cheques.
• There are more bills than you thought.
• You know what past-due notices look like.
• You get an overdue
balance on a credit-card statement.
• You avoid opening letters or answering calls.
• You rarely keep a running balance in your chequebook.