Dubai: The pandemic situation is majorly reshaping people's habits, shifting many individuals to online shopping platforms and using digital payment methods to cater to their lifestyle needs.
It is majorly influencing the reliance on credit cards to facilitate most payments. Even for the physical point-of-sale transactions, people now prefer to make purchases without exchanging any cash due to the COVID-19 situation.
Tracking expenses is vital during COVID-19
Indian businessman Amit Vardhan, 51, uses just one credit card for most of his purchases and utility bills payments. The COVID-19 situation has raised his family's use of online shopping and increased credit card usage online.
He said regular tracking of transactions and prompt payment of credit card bills become very critical in such times. It is essential to track all spends via SMS and email alerts to avoid unpleasant surprises of overspending situations. The bills also can be conveniently paid through bank transfers and standing instructions but should be carefully monitored at all times, Vardhan added.
He explained when family members overspent on allocated limits, sometimes an important transaction gets declined. “I missed an air ticket booking as the transaction did not go through. Therefore, it is important to check that your transaction is completed. Check bank alert messages regularly, and in cases where requirements change, you should top up and pay to keep limits going.”
TIP #1: Make the most of credit tracking apps
"These days, all the banks have provided useful mobile apps to track expenses, send regular mails or SMS alerts after each spend, which also provide details of available balances, helping curb overspending. I have defined expense limits for all family members who have supplementary cards as per their requirements, and I can increase and decrease these conveniently by a click on the app.
"We use a credit card to facilitate payment, make card payments regularly, and check the payment receipt and alerts after every transaction. A small mistake by a vendor can cause a problem. Report any unauthorized use and block card immediately if you suspect misuse."
A credit card, if effectively used, is the best way to pay. You can now even keep them on your mobiles, connecting them with Samsung pay, apple pay, Google pay etc., allowing you to keep your wallets light and save, Vardhan added.
TIP #2: Use your credit card within budget
Cherrie S. Lobo, 46, Filipino, said she holds three credit cards and uses each one for different purposes. "My husband and I have one card for all utilities/home expenses, i.e., our standard cost every month for groceries, bills, etc."
"I have one credit card for emergency-use only. And then I have another card for my personal use. The personal credit card is what I watch out for as I treat this as cash. I ensure not to purchase anything that I cannot pay in one go. I hardly make any instalments purchases because it carries additional fees," added Lobo, who works as a Business Support Manager in the aviation sector.
TIP #3: Beware of ending up paying more due to fees
Lobo recalled, "Once, we had purchased an appliance on sale that was not budgeted – thinking that we can pay it in instalments to take advantage of the reduced cost. But we ended up paying more due to fees and late payments. That is why we ensure we have funds first before we buy and not the other way around and adopt a strict no instalment buy strategy."
They prefer buying groceries in bulk and take advantage of any promotions. “Our finances are planned. We have a budget for the month and try our best to adhere to that budget. Any unused money goes to an emergency fund and is not carried forward the next month. This helps us build our savings too.
“The COVID-19 situation also helped us to minimise costs due to lesser dining out. But we frequently order with Amazon, so I make sure all notifications are switched on my phone for the Amazon app. In the past, I had witnessed a fraudulent transaction on my credit card from some portal, so I refrain from saving the credit card number in any app.”
TIP #4: Pick the right card, cap the limit
“We have picked credit cards that gives us good deals, cashback offers and rewards points. Using credit cards also helps us earn points on our lifestyle spending, but we use the credit card limit to the actual budget that we can afford to spend,” Lobo added.
Khetra Reddy, Senior Wealth Architect, Elixir Wealth Solutions, said that planning for a monthly budget means the family should use the credit card based on the actual income. He explained the real money your family receives next month and not any preconceived income, which results in revolving the credit.
"The limit on the credit card can be capped at 50 per cent of one's monthly income so that the family does not overspend and can avoid paying unnecessary interest to the card provider."
TIP #5: Spend credit only on shopping essentials
Reddy added that the best strategy is to use the credit only on an SOS basis and pay the outstanding amount in full every month without revolving the credit.
"During the onset of novel COVID-19, the use of online transactions has risen to avoid physical contact, shopping essentials during the lockdown and most of all to avoid the chances of increasing one of the biggest pandemics. Almost 60-70 per cent of payments happened through credit cards due to acceptability and ease of transaction."
TIP #6: Spend only on needs, not on wants
However, Reddy stressed that one should spend only on needs, not on aspirations. "Maintaining a good credit score/credit rating/ debt burden ratio' (DBR) is essential, especially in this region as a default on the card, in many cases, may land you with a travel ban, fines, and high interest on loans."
Recently, many online stores and card providers offer various offers and incentives to use a credit card while shopping online. "Many credit cards users are being notified through alerts or SMS about various exciting offers or forthcoming sale of various brands or stores. Carefully select the right offers and requirements of the stated product, sensibly opting for the value for money deals and focusing on the need over luxury."
TIP #7: Carefully opt for value-for-money deals
Reddy said the common mistake most people make is to buy high-value products in EMI through credit card. "This may often backfire when one misses paying the EMI for one month. It would then lead to 2-month instalment being accumulated along with interest from the previous month."
"Credit card interest-free days vary between 45-55 days depending on the card, and the interest on the credit card on the unpaid amount is 3.25 per cent per month, which makes 39 per cent per year. So it's a costly deal when it comes to revolving the credit. Therefore, always pay for the credit card in full before the due date," he added.
Here's what credit experts observe and recommend to residents
You should always plan your purchases, whether plastic or cash, said Tariq Ahmad Al Asmar, General Manager, Secured Assets & Liabilities, at Standard Chartered.
Buy what you already planned for and stick to that, Al Asmar recommended. "First, use your cards for essentials, groceries, gas, bills …etc., then for non-essential planned purchases on a certain budget. The smaller your surprise at the end of the month when you see your credit card bill, the better is your planning."
Al Asmar added that setting the sub-limit for family members is also key to controlling spending. "Make sure that it is set well in advance and instructions on what to use cards is clear."
Ask yourself: Is your credit limit higher than required?
Al Asmar also cautioned the card users never to let the credit card's ease of use entice them to make unplanned purchases. "Clearing out your balances on monthly bases should be your ultimate goal; if not, you should be as close as possible and minimise your cash withdrawal on a credit card, as there are the hefty charges."
"When you have the option of paying off your credit card over using the funds for discretionary spending, you should always choose the former. Sticking to a minimum payment on your card is not recommended, as that will result in high charges on your balances. Try to set up a payment instructions for your credit card payment, so you don't miss your payment."
Moreover, if your credit limit is higher than required, it is best to reset the credit limit to help you with your total liability calculations, Al Asmar added.
What are the useful market trends one observes?
Citing Visa’s published data, as of February 2021, Al Asmar stated that the industry has been averaging an 8 to 13 per cent annual increase in spending, except for 2020, where there was a 13 per cent drop due to the COVID-19 situation.
"It was clear that while the online shopping trended upward during the COVID-19 lockdown, international spends did see a significant drop due to limited travel. Customers used their credit card for their protection by shopping from the safety of their own homes. Those less fortunate who lost their income sources during the crisis used cards to make ends meet. We have also seen a significant shift in spending on essentials, food, groceries, and medical/health trends."
Has credit card spending returned to pre-pandemic levels in the UAE?
Kartik Taneja, Executive Vice President, Head of Payments at UAE bank Mashreq noted that the overall credit card purchases have returned to a pre-COVID-19 trajectory – roughly 30 per cent as more cash gets displaced by digital payments.
"In this, e-commerce had a period of massive increase during 2020 (>100 per cent). And now it continues to grow at a respectable 30 per cent. This is offset by the decrease in travel/airline/hotel spends. E-commerce now constitutes almost 1 in every $2 (Dh7.35) spent on cards."
Taneja added that Mashreq bank (and others) allow tools to manage your budgets, such as putting limits on categories of spending or overall spending. "Cards also allow you to plan big expenses by offering low-cost instalment plans that can enable better planning of cash flows. However, it's important to realize that this is a short term payment or borrowing tool, and use other financing methods when a longer time horizon is required."