The Debt Panel: 'My credit card loan has spiralled out of control'

I had a job where I earned a monthly salary of Dh12,000 ($3,267) in Dubai. I used my credit card prudently and paid off the outstanding bill every month . However, my father was hospitalised in my home country in March and I didn’t have spare money to pay for his medical expenses. Although I tried asking friends, no one could help me immediately. I had not replenished my emergency fund as well after dipping into it in February to pay off an unexpected car repair bill . My last resort was to take a loan on my credit card. I took out for a loan for Dh25,000 on my card. I was confident that I could pay off the balance in a few months. However, I lost my job in April and was unable to pay my credit card payments in full since my income took a hit. I resorted to paying only the minimum amount on the card. The outstanding debt soon swelled to an unmanageable amount. Are interest rates on a credit card loan higher than that of a personal loan? Why is this so? I could not do any research at the time since I was in a hurry to raise cash. I am considering a balance transfer to another bank to avail of a better interest rate. Is this advisable? Should I look out for a bank that offers a zero per cent introductory rate? I am now employed again, but on a lower salary. Please help me with my finances. AT, Dubai I’m sorry to hear about your father’s illness. Many people find themselves in the same situation: their parents back home have no health insurance and so the burden of medical expenses suddenly falls on them, whether they can afford it or not. Despite being fairly sensible with money, you have been hit by two problems at once, with medical bills and your job loss. This situation is so common that I urge you to take your emergency fund very seriously. It is sometimes the only thing protecting you financially. You had not had time to replenish your emergency fund after your car repair before the medical bill struck. I wonder if you had enough money saved for emergencies in the first place. Ideally, you should have six months’ total expenses saved up, which might be able to absorb the repair and medical bills. If possible, I recommend buying health insurance for your parents back home. That monthly or annual expense will protect you against sudden, unexpected medical bills. In some countries this is not available — you should then consider a separate cash buffer for your parents' health costs. Then you can look after them even if you lose your job or your car breaks down. You would have been better off taking out a personal loan rather than borrowing on your credit card. With your good credit history and reasonable salary, borrowing two months’ salary should have been possible with your bank or another bank. You would have got a much better interest rate, as personal loans usually (but not always) have a much lower rate than cards. The interest rate is determined by the bank’s perceived risk of not getting its money back. With a credit card, you could borrow up to your card limit with no fixed repayment term and you don’t have to give the bank a reason for the loan. Also, the bank offering you a credit card may not be the same bank receiving your salary, so they don’t have access to your savings or income if you stop repaying them. Applying for a personal loan, the bank has more control over the size, term and conditions of the loan, and they can ask what you want it for. Usually you get the loan from the bank that receives your salary. There are banks that offer a zero per cent balance transfer on a card or loan, but you would have to be sure you can pay the balance off in full before the promo period ends. Otherwise you will be hit with a very high interest rate and possibly charges as well. You can search for ‘balance transfer cards UAE’ to find the latest offers, though beware your new salary may not be sufficient to qualify. You should be able to convert your card debt into a personal loan at a much lower rate than what you are paying currently. Talk to your bank and other banks, too. Whether you take a loan or a zero per cent transfer, now is the time to do some research and actively get your finances back on track. I’m so sorry to hear your father was unwell. I hope he has now recovered and is in good health. Congratulations on your new employment. This affords you options — being unemployed does not. Credit card loans are the most expensive in the market. They carry the highest interest rates, often four to five times more than personal loans. Usually the interest rate quoted is the monthly amount. Multiply the rate by 12 and you will get the true interest rate. Also the penalties for not paying on time are very expensive. As you have experienced, the effect of compounding such high interest rates results in the debt growing fast. I recommend avoiding credit card loans as they are so expensive and can set people back financially for many years. Clearing this credit card loan and any outstanding credit card balance is crucial to you being financially secure again. You can consider a consolidation loan or a credit card balance transfer. You may be able to avail of an interest-free period on the credit card balance transfer. It’s important to note that the term on this form of credit usually is six to 12 months. It’s important to ensure you can afford the monthly repayments and do not risk raising a new credit card balance as your balance transfer commitments are absorbing too much of your income each month. Try also to negotiate a lower balance repayment with your bank. Ask that they consider reducing the interest due on the credit card loan if you pay it off early. Alternatively, a personal loan over a longer period of time may allow you to manage your debt by locking in a lower interest rate and a monthly repayment you can afford and commit to. I recommend that you also focus on replenishing your emergency fund, ideally three to six months’ living expenses. This will help protect you from being in this situation again. Credit card cash advances are certainly the most expensive form of borrowing. Interest rates can be as high as 37 per cent. You should seek to transfer to a personal loan so you can manage the debt. Be careful not to stretch out the term too long or be tempted to borrow extra on the personal loan or you may find yourself in further debt. The real cure for this problem is to manage expenses better. Many people miss out a monthly allocation for variable costs such as car repairs and maintenance, emergencies and miscellaneous expenses that quite often turn up every month. So first things first, go through your expenses and include an allocation for car maintenance and renewal, among other things, averaged out over a year. Build up an emergency fund and include an amount for miscellaneous expenses. Include your new personal loan repayments and future expenses. Having an accurate expense allocation is key and understand that it’s not set in stone. Go through your expenses every six months to help you keep moving in the direction of your money goals. Once you know your numbers, you will be in a good position to come out of debt and, most importantly, prevent the same from happening again. Remember, life is in session, so every now and again, unexpected costs will come up. Be prepared for them. The Debt Panel is a weekly column to help readers tackle their debts more effectively. If you have a question for the panel, write to pf@thenational.ae

The Debt Panel: 'My credit card loan has spiralled out of control'

A Dubai resident took out a loan against his credit card to fund a hospital bill after his emergency fund fell short