Manage debt through usage of debit cards

Long before they became a wallet staple, debit cards had been the shopping essential for Dubai expat Tasneem Raza.

The Indian national says debit cards offer a convenient way to pay for almost everything, from her groceries, salon visits, lunches to coffees.

This payment method also gives her peace of mind knowing she's spending her own money. Besides, she not only avoids neck-breaking interest charges, she easily keeps her monthly spending in check and angry credit collectors at bay.

"I've been using it in 90 per cent of my purchases for three years now. It is always a safer bet. You can have control on your expenditure for the month by using a debit card. My credit card control is very weak where I don't realise how much small spends add up to by the end of the month," she tells Gulf News.

To avoid draining her account, Raza makes sure she sticks to a budget each month. "I maintain an account with a certain amount of money which I allot myself for expenses every month. I use that against my debit card. It always works well for me as I know that's my limit for the month and I won't end up overspending," she adds.

Everyday payments

Like Raza, a growing number of residents in the UAE are switching to debit cards from credit cards, as consumers struggle to get a grip on their spending and break free from debt.

More than just a tool to withdraw cash from the automated teller (ATM) machine, debit cards can be used for everyday payments, whether shopping, dining or paying the bills. But unlike credit cards, debit cards withdraw money directly from the user's account, without interest.

According to electronic payments network Visa, first-half 2010 debit card transactions in the Gulf Cooperation Council (GCC) alone rose by 19.4 per cent, eclipsing the 0.6 per cent rise in credit card transactions. Based on Euromonitor International figures, the number of debit cards in the UAE increased by 57 per cent between 2005 and 2009.

Debit card numbers are also rising in Egypt, Oman, Kuwait, Lebanon, Bahrain, Qatar, Saudi Arabia and other parts of the Middle East. Topping the list in the GCC is Saudi Arabia, where debit card numbers rocketed from just over 13,000 in 2005 to at least 22,000 last year.

Growing popularity

"We are seeing growing popularity with debit cards globally as customers are more cautious with their credit and related costs. With a debit card, customers no longer have to worry about having enough cash in their wallet," notes Mustafa Ramzi, head of UAE Cards at HSBC.

"Customers cannot purchase more than their available funds in their account as purchases done by use of the debit card normally require online approval from the bank before transactions are completed. A debit card is thus an excellent facility to help people manage their finances," adds R. Sivaram, senior vice president-head of cards, retail cards business at Emirates NBD.

The legal difficulties associated with credit card defaults have also prompted many consumers to turn to debit cards.

"Factors such as the competitive charging differential between credit and debit card use, the legal hazards regarding defaulting on credit card repayments in the UAE, and the increased opportunities for foreign debit card use by Middle East cardholders, debit cards are becoming a more attractive offering for customers across the region," notes Andrew Rochford, solutions consultant at ACI Worldwide. Despite debit cards' rising popularity these days, some consumers still prefer to stick it out with the good old credit card. For Arefa Noor, an expatriate from Singapore, credit cards remain the most convenient spending tool. "I have a debit card, but I don't use it because it doesn't have a mandatory spending limit. Without the limit, you will end up draining your bank account because you're allowed to use your debit for as long there's money in there."

"I also find it easier to monitor my expenses with credit cards. The act of paying my credit makes me aware how much money I've spent and how far away I am from exhausting my savings," Noor tells Gulf News.

Noor says she doesn't have any problem with credit card charges because she settles her dues on time. "When you're in the habit of paying only the minimum, that's when you run into trouble," she adds.

Plastic Ease

The good thing about debit cards is that there are no interest rates, late payment charges and monthly dues to think about.

However, a study of the different debit card products in the UAE shows that one can still incur certain fees.

Some banks, like HSBC and Emirates NBD, issue debit cards free to their customers, but others charge annual membership fees (from Dh50 to Dh100) and even PIN maintenance fees for Dh20.

“Some banks do charge an annual fee for it,” confirms R. Sivaram of Emirates NBD.

There’s also a maintaining balance to keep in mind. Customers are allowed to use their debit cards as long as they have money in their account, even if it’s below the maintaining balance.

Once the ceiling is exceeded, however, the holder is going to be charged a penalty fee. Maintaining balance can vary and penalty fees in the UAE can be between Dh10 and Dh100 per month.

It is also normal for banks to charge foreign currency transactions or cash withdrawals at ATM machines abroad.

Although overdraft fees are rare because holders can only use the card if they have funds available in their account, they can still be applied.

“In some instances, if the card has been used without obtaining proper authorisation or if the merchant was late in presenting the transaction and the same has resulted in an overdraft on the customer account, the applicable overdraft account fees will apply,” says Sivaram.

“To avoid paying penalty fees, operate your account within the terms and conditions of the bank, just like with cheques etc. To avoid hidden charges, choose a reputable bank with a good reputation for customer service and transparency,” advises Rob Penn of ACI Worldwide.

Have your say
Which do you prefer – credit or debit cards? Why? What are the features you would like added to your debit card? Tell us.