Abu Dhabi: Excessive use of credit cards and personal loans is the greatest perpetrator of severe debt among residents in the UAE, with financial experts in the country also warning against borrowing money from private lenders.
Average consumer debt in the UAE stands at $95,000 per household or $114 billion in total, a study by Strategic Analysis, a research firm, showed. The UAE accounts for around 67 per cent of the total household debt in the GCC, with 60 per cent of those polled in the survey saying that a quarter or more of their salary was spent on paying back debts.
Those trying to pay back debts should consider stopping their current credit cards, following a plan to manage debts, and ensuring not to take additional loans to pay for current ones — a move that can lead to a vicious cycle of debt.
“Most expats underestimate the expense of life in the UAE, not least because they live to a higher standard than they might in their own countries. A lot of consumers manage fairly substantial debt — through mortgages, credit cards, and personal loans. In normal times, these are affordable, but in periods of stress, which some sectors are currently experiencing, these can trigger real difficulty,” said Stuart Ritchie, a chartered financial practitioner and wealth manager at AES International.
He added that debt can be a sensible part of residents’ finances, but they need to ensure they are able to cover such debts. Ritchie pointed that lower oil prices have led residents to be more cautious about their spending habits.
“We think this is quite normal; consumers are more concerned about job security. Well-publicised reduction in property prices and other economic factors have led to a tightening of belts. In many ways, we think this is healthy as it has triggered a general review of people’s debt and spending,” he told Gulf News.
According to the latest study by Nexus Group, a financial broker, responsible spending has become the mantra for 2016 given the pressure on regional economies from lower oil prices. However, this lifestyle change is easier said than done given the privileges that residents have been enjoying for years.
SS Raju, personal finance expert at Nexus Group, said that while residents should ensure their debts are managed efficiently, debt repayment as a ratio of income should be kept to a limit.
“In extreme situations, debt repayment should not exceed 30 per cent of your income — the remaining 70 per cent should be kept for savings and other expenditures.
And 30 per cent is the absolute maximum. Prudence would suggest it should be no more than 10 per cent. However, today, we find that many residents spend a great portion of their salaries paying back existing debt,” he said.
Of all the risks experts warned against when managing severe debts, resorting to private lenders was the biggest no-no, with Raju saying such loan sharks “must be avoided like the plague” as they can put residents in a sea of endless debts.
Similarly, Tim Searle, chairman of Globaleye, a wealth management firm, said that access to unsecured loans and reliance on credit cards remain common place in the UAE, especially as many banks license card marketing activities to third parties.
“These marketing companies are not concerned about the affordability or suitability of the credit card; they just want you to take one since they earn commission for each one sold. Some people will take another credit card in the hope that the bank will stop calling when in effect you have become further exposed to easy credit,” he said.
Searle’s advice to those trying to manage their debts is to only use a credit card as a short-term facility for unforeseen financial circumstances rather than a primary source of financing.
“Do not use a credit card to finance your lifestyle or you’ll be caught in the trap of taking more credit cards to pay off the other credit card(s). Sooner or later, a spiral of debt will have you so dizzy you will not know where to turn. Avoid credit cards if possible or make a commitment to pay down or preferably off your credit card so it will be there should a rainy day happen,” he said.