The Debt Panel: 'How can I pay off my maxed out credit cards?'

I am worried about keeping up with my credit card payments and the effect it will have on my credit score.

I have three cards that I have maxed out to their limit — two cards have a maximum limit of Dh10,000 ($2,722) and the third is Dh12,500.

I am only able to pay the minimum amount due each month on all three cards, which means my debt continues to go up rather than down because of the high interest rates they carry.

In the future, I would like to take out a mortgage and buy a property in the UAE. However, I am very concerned about my credit score.

At the moment, I feel as though I will be paying off the credit cards for years to come, rather than clearing the debt quickly.

I earn Dh15,000 a month, but after daily expenses, rent and other bills and incidentals, I am left with nothing to save and very little to put towards the credit cards.

If I only pay the minimum amount each month on the credit cards, will that reflect in my credit score? Can you also suggest ways to improve my credit score and pay off the credit cards? JB, Dubai

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

A credit card is a financial tool that can help you to manage your daily payments and transactions conveniently, have access to short-term credit, avail attractive shopping deals and discount programmes, as well as earn rewards based on your spending.

However, if your credit card spending is almost the entire limit, monthly payments and accumulated interest can increase and lead to potential financial problems if you are not able to pay back the outstanding amount in full.

Paying only the minimum amount required every month is a common practice adopted by many cardholders.

However, bear in mind that this can also result in the debt continuing to grow due to compounding interest charges, higher regular payments and the possibility of falling into a debt spiral.

Credit bureaus typically use information like your credit utilisation ratio, credit history and payment history to calculate your score.

If you want to maintain a good credit score, you must keep your utilisation ratio as low as possible and pay your dues regularly.

Credit cards come with limits and if you keep the total utilisation low, it will only benefit you. Moreover, if you keep paying your dues on time, it will also reflect in your credit report and help you to maintain your credit score.

However, if you keep paying only the minimum amount, it will have two effects: firstly, your credit utilisation ratio will not go down significantly, as you are only paying a small portion of the total due.

Secondly, it will appear on your credit report as “on time”, but you will still carry significant debt.

So, if you apply for credit, the lenders may reject your application based on the fact that you are not a capable borrower as you are unable to clear your credit card dues and barely making up for it.

Given your current credit card utilisation, the one thing you can immediately do is speak to your bank and share the full details of your financial position.

Based on your proactive approach, your bank will most likely be open to reviewing the situation and possibly consolidate your outstanding debt into a low-interest instalment plan on your credit cards or convert it into 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 your expenditure — this will help you to clearly define how you propose to repay it and become debt free.

Watch: Understand your finances

The bank may also want you to surrender your credit cards to prevent you from incurring further debt while you pay off the loan. If you have credit cards with another bank, then you should also stop using these during this time.

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 other expenses.

Try to foster a habit of putting a percentage of your earnings aside as savings to help you for a “rainy day”.

It is commendable that you are reaching out for assistance and are looking to make changes before it is too late.

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

Even though minimum credit card payments may sometimes seem helpful, they’re almost always a mistake in the long run.

Making minimum payments can snowball into a big problem — potentially hurting both your credit score and your wallet.

If you only make the minimum payment on your credit cards, it will take you much longer to pay off your balances — sometimes by a factor of several years — and your credit card issuers will continue to charge you interest until your balance is paid in full.

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 cards in full.

A loan will carry a much lower interest rate than your credit cards.

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.

Your credit score is one of the most important measures of your financial health, as it tells lenders how responsibly you use credit.

The better your score, the easier you will find it to be approved for new loans or new lines of credit.

A higher credit score can also open the door to the lowest available interest rates when you borrow.

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

Credit cards tend to have the highest interest rates of any debt products available, so you are right to make it a priority to pay off this debt quickly.

In terms of your credit score, it is made up of payment history (how reliably you have been making payments), credit utilisation (how much of your available credit you use), and recent credit activity (loan or credit card applications and closures).

You can easily download and check your credit report from Al Etihad Credit Bureau for Dh105.

If each of your credit cards is maxed out, this is likely to negatively affect your credit score. However, if you have been consistently making the minimum payments every month, this will positively influence the number.

Once you see the report, check it is accurate and formulate a plan to increase your credit score and pay off your debt.

Since your debt totals are similar, I suggest using the debt avalanche method to pay off your credit cards. Pay all the minimums, then overpay as much as you can to the card with the highest interest rate, working your way to the lowest interest rate card.

To allocate more money to debt payments, you should stop using the cards for further purchases.

Even if you use it temporarily, the cash envelope budgeting method (allocating limits for each spending category and placing that amount into an envelope for spending for the month) is renowned for helping people to pay off debt quickly as it prevents you from overspending.

Then list out all your expenses and split them into needs and wants (needs would include things like food, rent and utilities, and wants might include eating out, spa appointments and hobbies).

You can start by reducing the “wants” column to make savings while you are paying off the credit cards.

You could also aim to reduce your three biggest spending categories or complete a no-spend challenge to reset your spending habits.

Additionally, you can perform a “values analysis” of your expenses (rate each expense out of 10 — a rating of 10 means that spending that money brought you joy and was worth it and one means that you regret the expense).

Once you have rated your spending, you can cut things that you don’t value.

You might also consider ways you can top up your income by offering freelance services or selling products.

All extra money you earn from side hustles can be put towards debt payments.

Celebrate milestones along the way and visualise what it would feel like to finish paying off the credit cards and recall that feeling if you feel like giving up or overspending.

Good luck on your debt-free journey.

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