Are you overly reliant on credit cards? Avoid these mistakes when on a tight budget
Credit may seem like an easy option to stay afloat when on a tight budget, but not always
Dubai: When times are tough and purse strings tighten, credit card debt may be inevitable if you're learning to manage credit or are forced to make risky financial decisions due to hardships.
For Abu Dhabi-based corporate lawyer Mary Thomas, this was the reality in 2021 when her husband Ebin lost his job, and she took a pay cut. For the next year or so, they found themselves heavily reliant on their credit cards to get by and accumulated over Dh50,000 in debt.
"We got our debt paid off in 2023 after we decided to live a strict no-credit card lifestyle for little over a year," said Thomas, who documents her journey on her blog. "We didn’t want to rack up high-interest debt, so we have been very strategic and intentional with how we use our credit card ever since."
Learning of this no-credit approach to get out of debt, Essam Kabeelali, an Abu Dhabi-based credit advisor, reiterated an advice that he often gives those burdened by high-interest debt and living within their means.
“Having a plan can help you avoid debt or keep it manageable when money is tight. If your circumstances allow it, consider alternatives before making credit card mistakes that make it difficult to bounce back,” he said, before listing out a few such possible mistakes.
We got our debt paid off in 2023 after we decided to live a strict no-credit card lifestyle for little over a year
Mistake #1: Spending as usual after circumstances change
Change your budget if circumstances are jeopardising it. Thomas too had to frequently adjust her family budget to include the varying charges of fuel, and internet and cell phone bills on her credit card.
To balance fluctuations in costs, she scaled back in other areas and opted for alternatives. The family now dines out and travels less, and the kids are attending a less expensive arts camp. “Look at the budget and take a hard look at those needs versus wants,” Kabeelali added.
“As you're reviewing your credit card statement, consider cutting out unnecessary purchases or unused subscriptions. Prioritise rent, utilities, food, and expenses that help bring in income. If you're still stretched financially after making changes, choose between cutting expenses and bringing in income.”
Mistake #2: Not using credit card limit to your advantage
Trimming your budget may offer opportunities to save that prevent you from relying on credit cards, advised Kabeelali. “Save what you can - even just around Dh20 per week. An emergency fund is foolproof, but a credit limit can eventually max out or get slashed at the issuer's discretion,” he added.
“Before that happens, you could also try requesting a higher credit limit from issuers when accounts are in good standing. This way, you have some credit available as a last-resort option that supplements an emergency fund.”
Note, an issuer may run a 'hard inquiry' on your credit after making this request, an action that can temporarily drop credit scores. (When a lender requests to review your credit reports after you've applied for credit, it results in a ‘hard inquiry’, which usually impact credit scores.)
Mistake #3: Still carrying a balance on high-interest credit card
Carrying a large balance on a high-interest credit card makes purchases more expensive. For credit card account interests assessed since 2021, the average rate was 16.5 per cent, according to multiple global statistics. Some credit card interest rates run even higher at 29.99 per cent.
“While a card's interest rate depends on economic factors and your credit, some cards or institutions offer lower rates that may save money on ongoing balances,” said Rajesh Markara, another Abu Dhabi-based debt advisor.
“If you need a debt payoff strategy, a good credit score [of 690 or higher] may qualify you for a balance transfer credit card that allows you to move a high-interest balance onto a new card at a lower rate. Weigh the cost of the balance transfer and the ongoing interest charges to choose the best option.”
Markara further noted that the ideal balance transfer card has no annual fee, a low balance transfer fee of 3 per cent or less, and a long enough zero per cent introductory interest rate period to make progress on debt.
Mistake #4: Mistakenly taking cash advances on their credit card
Another credit card mistake that both Markara and Kabeelali agree is among the most common among those on a tight budget is slipping up and taking cash advances on their card.
“Think twice about cash advances. A credit card cash advance conveniently provides a short-term cash loan at a bank or ATM, but it's costly. The interest on the amount of cash borrowed starts accruing immediately and fees may apply,” added Kabeelali.
“Instead, consider a personal loan or targeted offers from issuers that turn available credit on a credit card into a less pricey instalment loan that puts cash in your bank account. For the latter option, there's no loan application or credit check required”.
A credit card cash advance conveniently provides a short-term cash loan at a bank or ATM, but it's costly
Bottom-line: Crunched for cash? Avoid late payments, fees by planning ahead
Being on a cash crunch is a good time to use your emergency fund, as this will avoid the fees and interest associated with a cash advance. Be sure to replenish it after tapping into it.
Even though you may incur late fees, late payments generally won't end up on your credit reports for at least 30 days after the date you miss the payment, knowing this will make it easier to plan your payments as and when cash flow comes in .
If you foresee a late payment, contact your credit card issuer quickly. A late fee can cost up to Dh100 the first time and up to Dh150 after, according to a 2023 statistic.
Some issuers may be able to change your due date, refer you to a credit counselling agency that provides a debt management plan, according to Markara. These programs may waive fees or lower interest rates for a certain time frame.