<i>I had five credit cards, which I settled after securing a Dh220,000 personal loan three years ago. I’d accumulated the debt by investing in various businesses using the cards. I earn Dh12,500 as a software application engineer in Dubai and my monthly repayment on the loan is Dh5,800. I have one more year before that loan is clear. During my financial crisis, I also borrowed money from friends and I have a loan in my home country.</i> <i>My debts amount to: outstanding balance (monthly payment)</i> <i>Personal loan: Dh51,000 (Dh5,840)</i> <i>Credit card: Dh5,100 (Dh990)</i> <i>Loan from friends: Dh30,000 (Dh2,000)</i> <i>Loan from India: Dh30,000 (Dh1,500)</i> <i>Total: Dh116,100 (Dh10,330)</i> <i>I am really struggling to make ends meet and I need to borrow more money for personal needs and to support my wife who had an accident. However, my low credit score with Al Etihad Credit Bureau is preventing me from getting credit approval.</i> <i>For the last three years I have not sent a single dirham home, while I work to solve my debt problems. It also means I have not been saving. My personal situation is making me sick with stress. I need urgent funds of Dh20,000. This will help me clear the credit card debt, as I am simply paying interest and over-limit and late fees every month. My father also requires treatment at home. The Dh20,000 would give me peace of mind.</i> <i>My monthly expenses come to Dh1,200. What is the best way to secure the credit?</i> <b>AJ, Dubai</b> You have done well in closing your previous cards by securing a personal loan. Cards usually carry substantial financing rates that can become a burden to the borrower if the balance is not cleared each month. Your high debt burden ratio (DBR), over-the-limit balance and missed payments can have a serious impact on your Al Etihad Credit Bureau score. As you may have also found, hefty penalty charges are attached to late repayments and over-limit usage, which will ultimately make your journey out of debt more challenging. You should not seek to increase your liabilities further but instead focus on proper fiscal management. Make a conscious effort to maintain timely repayments, closely monitoring your expenditures and settling your existing debt obligations. Also, meet your bank to negotiate a restructured agreement that consolidates your debts into one composite loan with lower rates and a rescheduled tenure. Your bank may also give you temporary relief by providing payment breaks or late payment penalty waivers. In general, lenders don’t want borrowers to default so they are more likely to be receptive in assisting you. It is good to know that you have friends who can help you out during this difficult time. Have you asked them for the possibility of postponing the repayment of your debt once you are in a better financial position? This may give you the space you need to secure your financial footing. It might also help to request assistance from other family members to contribute to supporting your wife and father. More than 80 per cent of your monthly income is going towards your outstanding loans, credit card debt and personal debt owed to friends. Add to that your monthly expenses and there's hardly anything left to spare. Additional debt is not the answer. You need to take a closer look at all your debts and optimise your repayments. Tackle the biggest pain point first — your credit card debt. While the original outstanding balance is not very high (Dh5,100), you're spending a significant amount on interest and penalties. Figure out how to move your financial commitments around to free up some spare cash to pay off and close this credit card. For instance, ask your friends to postpone two or three of the instalments due to them. Alternatively, approach your credit card provider to restructure the outstanding balance into a fixed-interest loan. Once the credit card debt is taken care of, you can resume remitting money to help your family back home. But don't get carried away with the surplus cash — you still have a year left to get rid of your biggest debt obligation. Now let's address the issue of your credit score. Your excessive dependence on debt would have lowered your credit score. Now that you've exceeded the limit on your credit card and are accruing late payment fees and penalty interest, your credit score will only deteriorate further. Just as Rome wasn't built in a day, you can't improve your creditworthiness and credit score overnight. You are addicted to credit and you have to break this addiction. Borrowing another Dh20,000 will not fix your problem. I expect you have learnt that investing in businesses using credit cards is a terrible idea. The business would have to be returning you nearly 50 per cent per year on your investment for you to break even. Now you have been given a brutal reality check, as debt consumes almost your entire salary. If you can shake off your debt habit, you will be able to have prosperous life; you have a reasonable salary and very low living costs of less than 10 per cent of your salary. You will be able to save and invest rapidly in diversified stock and bond funds, property etc. So, let’s figure out how to fix your debt problem. Your poor credit score is actually helping you by preventing you from accumulating more debt. Constant over-limit and late fees are also a warning you must take action. You have rightly identified your credit cards as the debt you have to pay off first. You appear to have nearly Dh1,000 left over each month after loan payments and living costs. If it isn’t being consumed by late fees and missed payments, put it towards your credit card balance. Talk to your bank to see if they can wrap the credit card balance into your personal loan, so you don’t have so much to pay each month. Show them a plan of how you will make the repayments. Ask your friend who gave you a loan if you can take a payment holiday for two to three months so you can pay off the credit card debt. Alternatively, see if they will lend you the Dh5,100 to pay it off. Even if you then pay them Dh3,000 for six months, you will have removed the dangerous credit card balance and made a big step forward. Take this relationship seriously and show them a clear plan, then show them that you have actually paid off some of the card balance each month. Put your card in a bowl of water in the freezer — you must stop using it as an investment tool and as a cash flow aid. You probably cannot reduce your living costs much further but you can try to boost your income. Keep looking for better-paid jobs or promotion opportunities at work. See if there is other work you can do in the evenings and weekends, helping other software teams or using any other skills you might have. See if any other family members can help your family to reduce the pressure on you until you are back on your feet. The next year or two are going to be tough, but if you have clear intentions about what you are doing and why, you will come through this period. Then with the financial discipline you have developed, you will rapidly build savings. But remember, no more credit for you — those days are over. <i>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</i>
