Quarter of UAE bank customers use cards to pay off other debts

More than a quarter of bank customers surveyed by a financial comparison website admitted to using loans or credit cards to pay off other debts.

About 28 per cent of respondents in a compareit4me.com poll said they had borrowed to pay off old debt. A quarter of those surveyed had more than three credit cards.

Credit growth has outstripped economic growth continually since 2009. Last year, the country’s credit-to-GDP gap, a measure of banking system stability, was higher than both the US and UK.

Household loans have grown by about 12 per cent in the past year, according to data from the UAE’s central bank, while deposits have grown by only 10 per cent, indicating an increase in the country’s credit-to-GDP gap.

Accelerating inflation is also eating into living standards for many. Economists predict that inflation could hit 5 per cent in Dubai before the end of the next year, as housing allowances and incomes fail to keep pace with rent increases.

But despite economic headwinds, consumers should take care to pay off debts using products with lower interest rates, financial advisers said.

Annual percentage rates (APR) vary significantly across debt products, meaning consumers could save sizeable amounts of money by switching from a credit card to a personal loan.

“You have got to be careful about refinancing,” said Ambareen Musa, chief executive of Souqalmal, a financial comparison website. “When you consolidate debt, sometimes it can be cheaper and other times it can be more expensive.

“When refinancing existing debt there could be fees. There may be arrangement fees if you take out a personal loan, and there may be transfer fees if you move money from one bank to another,” Ms Musa said.

Consumers also need to make sure that the duration of the loan does not lead to higher total interest payments.

With a personal loan, “you may have a lower rate, but you may also be repaying the new debt over a longer period”, Ms Musa said. “That means you could end up paying more interest in total.”

The consumer also needs to check whether any new loan terms include “flat rate” interest payments or “reducing rate” payments. Flat rate payments are calculated against the total value of the principal on a loan, while reducing rate payments take into account any repayments of principal.

Increased competition in the banking sector is benefiting consumers, Ms Musa said, as a wider range of products becomes available and lending rates fall.

“More consumers are seeing they can refinance their debts at lower rates, because they’re finding they can refinance at lower rates in the market,” she said.

The survey was based on 2,378 respondents.

abouyamourn@thenational.ae

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