Brett Williams, an anthropologist and author of a book on the credit trap, once said credit cards are designed to help us dig ourselves into debt and stay trapped there forever. It can be difficult to pay off a credit-card debt, particularly if you are only making the minimum payment each month. One option is to transfer your balance to a card with a more favourable rate.
Do your research
But how do you choose the best one? Always start by doing your research, say experts. There are a number of good deals available in the market at the moment. Standard Chartered and HSBC, for example, are both offering zero per cent on balance transfers for six months.
The interest rate is the most obvious, and arguably the most important, consideration. But it is not the only one. “Not all cards are created equal,” says Amit Mitbawkar, a Senior Wealth Manager at Elixir Wealth Solutions. “Read the fine print before you sign. Some cards will do what they promise when transferring the balance, but that is the hook they use to get you to use their card in the long term.”
Compare the interest rate once the promotion period ends with what yours is now. In the UAE, this is typically about 3 per cent a month, but can vary anywhere between 1.5 per cent and 4 per cent a month.
The fine print
To complicate matters, many cards also offer benefits such as free rounds of golf and extra air miles. But do not be blinded by them, says Andrew Prince, a financial planner with deVere Acuma.
“Few read the small print when applying and base their decision on what freebies or offers are available such as a free round of golf a month and additional air miles,” he says. “We humans are fickle creatures and make decisions based on emotion, not small print and legal jargon. Only when we pay the price for immediate gratification do we complain about life being unfair.”
Mitbawkar once took out a credit card with a local bank because it offered him free golf every month. But the bank did not stop him from crossing his limit, which cost him a penalty and more interest on top when he did.
“The onus is on the customer to keep monitoring the card balance to ensure they do not cross the limit. I told the bank this was unfair but they said we can cancel the card if we don’t want it,” he says.
Late payment fees
But just reading the small print is not enough. Max Durrant, a senior associate at financial adviser Holborn Assets, suggests you should subject them to a stress test too. “When you look at the terms and conditions you should stress-test them so that in the event you are late with payments [you know] what it is going to cost you in all reality.”
That includes calculating the late payment fee, plus the interest on the money that is due.
“People get caught up thinking they have paid the late payment fee without taking into account the interest and all of that,” says Durrant.
Late payment fees range from Dh175 to Dh275 each month, says Prince.
“So if you lack discipline to pay on time or fail to set up a standing order, then potentially whatever you owed has increased by Dh3,000 during the past year,” he says.
But if you perpetually pay your credit card late, you have a much bigger issue.
“It means you have a serious and systemic debt problem in the first place,” says Mitbawkar.
And even if you pay on time every month, but only the minimum, you are not really in the clear.
Take a balance of Dh50,000, paying the minimum of 4 per cent each month at an annual rate of 27.9 per cent.
“With the above figures, you will have taken 27 years to pay off that debt and paid a total of Dh119,000 or broadly 2.5 times what you owed in the first place,” says Prince.
“Now some people I meet argue they don’t want to save 20-plus years for their retirement and yet unwittingly are signing up to pay a debt for that amount of time.
Perhaps it’s a case of prioritising and establishing a little structure into your habits.”
As Prince points out, failing to address how and why you built up the debt in the first place means you might be caught in a snowball of debt where you max out one card, then take another to pay the first before consolidating them into one big loan.
So by all means, sign up for the balance transfer if it will help you get out of debt, but make the most of the zero per cent offer and pay off as much of it as quickly as you can.