Stock - Credit card
It isn’t easy to track expenses when one has more than a couple of cards, especially if there's no way to record every transaction. Image Credit: Shutterstock

The pandemic has led UAE residents to consider increasing their money supply, and credit cards, with ease of usage and immediate liquidity, have helped them gain temporary buying power. Contactless payments have skyrocketed, and bulk of them are done via credit cards.

According to Carol Glynn, a finance coach and chartered accountant at Dubai-based Conscious Finance Coaching, the need for multiple cards has not been created because of increased online shopping but because of overspending.

“People have multiple cards to utilise various discounts, cash back or points systems. Others have because they maxed out the ones they have and take out new ones to use further credit. This happens when they are already living pay cheque to pay cheque and beyond their means. And some also consider it as a status symbol and a sign of wealth,” Glynn said.

“Although many people have the discipline of paying credit card bills fully on time, the trouble happens when people lose income or have their income reduced and do not have an emergency fund or savings to support them.”

“A minority use them to create a lifestyle beyond their means. For others, it is the consequence of not paying their credit card bills in full. They incorrectly believe that paying the minimum balance protects them from penalties and interest.”

Multiple cards

Damodhar Mata, Senior Consultant at Nexus Insurance Brokers, stated that having many cards in your wallet makes it difficult to curb the urge for instant gratification. They make people feel wealthier, and they end up purchasing things they otherwise wouldn’t buy.

“It isn’t easy to track expenses when one has more than a couple of cards, particularly if they do not have an efficient system and intent to record and track expenses. Such people tend to breach their budgets (if they have one) more often and are likely to get them into a debt trap.”

Khetra Reddy, senior wealth planner at Elixir Wealth Solutions, said that the problem arises when people are not using the lowest limit card for regular usage and spending more in anticipation of future earnings.

“Many of my clients spend at least 20 per cent of their monthly income on credit card payments, which drags them to live pay cheque to pay cheque. They fail to increase their savings and decrease their liability.”

Another mistake is rolling over the credit card and getting charged with an interest of 36 per cent, which is the highest interest, said Reddy.

“People often forget that if they continue to pay the minimum amount on their card, it takes 14-24 years to clear off their outstanding, depending on their card limit - a higher limit needs more years to clear.”

Job loss or income reduction further adds to the debt burden.

Maintaining debt control

Reddy advised people to avoid high-value credit card transactions to prevent their monthly budget from being compromised. “I encourage people to create an emergency fund for themselves, basically 6-12 months of their monthly salary/income.”

“And if they are already rolling over the credit, starting the ‘Debt Stacking’ process for one year will help them eliminate their liability to a large extent. Debt Stacking is a process in which the lowest outstanding amount is to be paid first and the minimum payment to other cards.”

A simple way to reduce the higher outstanding on the card is to pay off as much as possible. “If the credit card due amount is Dh50,000 and the income is Dh10,000 per month, and if the person pays 10 per cent every month, i.e., Dh5,000, it will clear up the balance in about seven years.”

He also suggested taking up personal finance to pay the due bill in full.

Here, Mata added that very few cardholders know that banks in the UAE charge 36-45 per cent per annum as interest on credit cards. “It is at least 10 times that of a mortgage and 3-7 times a personal loan.”

“A person with a Dh15,000 salary and an outstanding of Dh75,000 on four cards, Card 1 - Dh20,000, Card 2 - Dh18,000, Card 3 - Dh12,000 and Card 4 - Dh25,000, would mean a total minimum payment on all cards is Dh3,750. If they only pay the minimum due, it could take decades to pay them off.”

Use cards to your advantage

A credit card overspending and debt trap is a common concern for many card users in the UAE.

However, long-time Dubai resident Praveen Mehta, a CA, founder of a management consultancy and a real estate investor, said he used a credit card as a convenient payment method rather than considering it as extra purchasing power that proved very rewarding.

He showed how he used the credit card for 24 years to his advantage:

1. I do not take a credit card limit of more than my one-month salary. If I take more credit cards due to different benefits, I reduce limits accordingly so that the total limit on all cards doesn’t exceed my one-month salary.

2. I always link my credit card to my salary account with an automatic 100 per cent payment.

3. I use my card for all the payments and as a result, my high spending gets me bonus points and related benefits.

4. As a high digital spender, I receive cash backs, offers, and redemption vouchers from my points, and over the last 24 years the value of all these exceed the value of a studio apartment in Dubai.