The Debt Panel: 'I can't afford to pay my credit card bill this month'

I have recently been inundated with calls from my credit card provider, offering me a higher limit on my card.

Although I initially ignored the calls and unsolicited credit limit increase, I was tempted by the offer and ended up accepting it.

I went on a spending spree to take advantage of the higher credit limit on my card. My new card limit is Dh50,000 ($13,614), an increase from Dh30,000.

Previously, I have been guilty of paying off only the minimum amount on my credit card balance, which has affected my credit score.

Although I jumped at the offer and gave in to the temptation of spending, I now feel guilty and worried, as I don’t know how to pay off the debt.

This month, my credit card bill is almost Dh20,000, while my monthly salary is only Dh12,000. I am clueless about how to clear my credit card balance.

Shouldn’t banks be more prudent about who they offer higher credit limits to? Don’t they do due diligence and have access to my credit score from the Al Etihad Credit Bureau?

In future, what factors should I consider before accepting a higher credit limit from a lender — and how can I pay off my current balance? PB, Dubai

Debt panellist 1: R Sivaram, executive vice president and head of retail banking products at Emirates NBD

It is very important for you to take stock not only of your current financial situation, but also your lifestyle choices.

If your credit card spending is out of control, monthly payments and accumulated interest can also increase and lead to potential financial problems if you are unable to pay the card off each month.

A bank would normally review your income, credit score, and your history as a customer before they decide to offer you a credit limit increase.

A bank may also do so if you are a good customer who pays your bills on time and uses the card responsibly.

As I understand, the bank has asked for your consent before increasing your credit limit.

You had the choice to accept it and get a higher limit or decline it and keep your limit where it was. Based on their needs, some customers choose to accept such an increase, while others turn it down.

This has to be done considering your coming spending needs, your ability to repay and your ability to save for yourself on top of your credit card repayments.

However, if your debt is weighing you down, a credit limit increase may not be in your best interest. If you are living from pay cheque to pay cheque and using credit to cover daily expenses, a higher limit means you will fall deeper into debt.

One thing you can do immediately is speak to your bank and share full details of your financial position.

Based on your proactive approach, your bank might be open to reviewing the situation and possibly consolidate your outstanding debt into an instalment plan or a personal loan with a lower interest rate and a longer payment term.

Ideally, you should seek a low monthly repayment over a longer time period, which will provide flexibility while hopefully avoiding the need to borrow again.

When approaching your bank for a loan consolidation, you should have a clear plan detailing your income and expenditure — this will help you clearly define how you propose to repay your borrowings and become debt free.

It is important to also work on a budgeting plan and set aside a monthly limit on your discretionary spending outside of essentials such as groceries, utilities, school fees and others. Try to foster a habit of putting a percentage of your earnings aside as savings to help you on a “rainy day”.

Debt panellist 2: Jaya Ratnani, managing partner at Freed Financial Services

It is important that you understand how to use a financial product responsibly, as it can lead to unwanted repercussions.

Your debt-burden ratio is a factor that is used by UAE banks to calculate your eligibility.

The central bank states that your DBR ratio cannot exceed 50 per cent. When approving credit cards, only 5 per cent of the credit limit is considered to calculate your DBR.

So, if your salary is Dh12,000 and you do not have any other loans, the bank has provided you a limit of Dh50,000. This means the minimum payment will be Dh2,500 per month, which is within the approved norms.

Paying only the minimum amount every month is a common practice adopted by many card holders.

However, bear in mind that this can also result in the debt continuing to grow due to compound interest. This leads to the threat of falling into a debt spiral.

One option would be to take out a personal loan from the bank where your salary is transferred and use the funds to pay off the credit card in full.

A loan will carry a much smaller interest rate than your credit card. If you are worried about the monthly payments, you can request to extend the tenure and reduce the instalments to an amount you can afford to pay.

I would recommend that you immediately cancel the credit card or ensure you reduce the limit to an amount you need only for emergency purposes.

It is also wise to manage your expenditure and budget to ensure you can allocate enough to pay your monthly instalments.

Debt panellist 3: Alison Soltani, founder of Leap Savvy Savers

Credit cards can serve as useful financial tools when used wisely. The problems occur when we overspend and are unable to pay back the balance.

Interest, which averages more than 30 per cent a year for credit card balances and accrues daily, plus late fees, can sometimes mean that the balance continues increasing despite efforts to pay it off.

It is true that banks use your credit score and income to assess your eligibility for credit and determine your credit limit.

However, it’s worth noting that credit cards are a product offered by banks to accumulate profits — your debt will increase their revenue, thus they are motivated to increase customers’ credit limits.

To tackle your current bill, first calculate your savings rate — your total income minus your monthly expenses.

This gives you an idea of how much disposable income you have to put towards the debt.

Make a plan to pay off the debt using an online debt pay-off calculator. You will need your interest rate and balance and you can insert monthly contributions. The calculator will work out how many months it will take you to pay off the balance.

If your savings rate is low, write out all your expenses and categorise them as “needs” and “wants”.

Starting with the list of wants, decide which expenses you can cut or reduce while paying off the debt.

You could try a savings challenge or no-spend challenge to motivate you to reduce your spending. Refrain from using a credit card while you are paying off your debt.

For the future, build an emergency fund of at least three to six months’ worth of expenses.

This can be kept in a separate savings account and drawn on in an emergency.

If you return to using a credit card, you could try paying it off every week and setting a spending limit for yourself each month.

Track your spending and once you reach your limit, lock away your card or give it to a trusted friend or partner for safekeeping until the next statement period begins.

You could start saving money each month into an account and name it “fun money”.

This is the account you can dip into guilt-free when you feel the temptation to spend money. Having some savings prevents you from going into debt when an opportunity to spend extra money arises.

Finally, consider the circumstances that led you to overspending in the first place.

Common spending triggers include emotions such as boredom, stress, happiness, guilt, a coping mechanism for certain life events, or a childhood experience of money.

Finding more effective ways of dealing with the root cause of triggers can help to reduce impulse spending in the long term.

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