Dubai: Conservative credit limits, tighter caps on cashbacks, term deposits as collateral – these are just some of the steps banks are taking to protect themselves in an environment of rising interest rates, even as they push credit cards aggressively to more and more customers.
Average monthly rates on balances have gone up from 2.99-3 per cent in 2022 to 3.25-3.85 per cent currently.
Lower credit limits
Anita Yadev, the CEO of Global Credit Advisory, said, “Customers need to be mindful of the underlying terms and conditions when taking new cards. Banks have different terms and conditions for different credit cards, and they have become stringent when offering credit limits to customers.”
For example, banks may offer lower credit limits to customers with riskier profiles, while long-term customers with a good account history get higher credit limits. “Moreover, credit card customers are being asked to tie their salary account with the bank, giving them visibility and control over cash flow,” said Anita.
Maintaining a good credit score is essential in any borrowing. The younger generation who have just come into the workforce would have lower salaries and overall lower wealth. They should keep their credit card limits low. Don't overindulge.
Banks often insist on taking term deposits from customers to secure the credit card limit. “Banks issue credit cards secured by term deposits, and as long as the customer continues to pay on time, they earn a fixed interest against the deposit. If the customer does not honour their payment commitments, the bank can pay the outstanding credit card using the term deposit without the customer’s permission,” she explained.
Term deposits to secure credit cards are usually taken from customers if they cannot connect their salary accounts to the credit card issuer. “However, this is common among senior corporate executives who take the credit card to avail its many benefits such as lounge access or gym memberships, for example,” she explained.
Because interest rates are rising, default rates on higher interest-rate products like credit cards are also higher, said Ali Imran, Co-Founder and CCO of Go Finance.
“Also, banks have gotten stricter as far as underwriting is concerned. Banks are adopting a ‘self-selection’ process (part of screening criteria for new customers), adding amendments to existing products that automatically screen customers even before they apply for the card,” said Imran. By doing this, banks do not have to underwrite applications from customers with a high potential of declining credit card applications.
Cap on benefits
Banks also try to shed credit card businesses that don’t earn them money. “They are capping benefits. Earlier, cash backs on credit cards were offered without a cap. Now, they have narrowed it to limited amounts,” said Imran. For example, Dubai First provided a credit card with unlimited five per cent cash back on all transactions. Last year, the bank capped the limit at Dh400 per month. “Banks have also introduced caps on 2-for-1 offers on products. Earlier, they were offering 20 products under this offer. Instead, they are providing it on 10 products,” said Imran.
Personal finance experts say banks have also stopped retaining customers who don’t make them money. “Customers who pay their total outstanding in full ahead of the due date are being let go of in case they want to move their business to another bank. Banks want to retain customers with higher default rates to save on holding costs,” he explained.
What about demand for cards?
On the consumer front, customers are not moving their banks regularly. Imran said they are taking their credit cards from a primary bank holding their salaried accounts. “These mechanisms adopted by banks align with an overarching theme of moving customers towards deposits, which helps hedge banks against market fluctuations and encourages responsible spending and saving habits among customers,” he added.
According to Anita, given the state of UAE’s economy and the robust job market, borrowing, including credit cards, continues to experience an upward trend.
According to the UAE Central Bank’s Q2-2023 Credit Sentiment Survey, credit appetite increased across all categories, of which credit cards, housing and car loans had the most significant impact on financial institutions’ credit appetite. But that could soon change.
“Since interest rate increases significantly impact personal borrowings, global macroeconomic conditions will eventually impact UAE borrowing trends. In the past year, we did not see any dampening on demand; however, going forward, borrowing is expected to slow down by Q1 2024,” she said. Revenge consumerism trends are also expected to end by the end of 2024.