The Debt Panel: 'I haven't used my credit card for three years but the amount I owe on it is ballooning'

I have a credit card that was placed on a settlement plan in 2018 for three years. The monthly instalments were set at Dh3,045, which I paid regularly until March last year, when the company I worked for closed. While I have a new job now, it is on a much lower salary and I was unemployed for most of last year. From March to January, I tried to pay as much as possible to pay down the debt using my savings and money from my family. In March this year, I resumed payment of the agreed amount. However, my lower salary means that I am not in a position to pay Dh3,045 every month, so I approached the bank and asked for a second restructuring that capped the payment at Dh2,000. I paid this amount in April and May. While the bank agreed to my request, they asked me to pay an interest rate of 1.79 per cent a month, which works out at more than 60 per cent of the outstanding debt, meaning the instalment will most certainly not be Dh2,000. According to my bank, I currently owe Dh59,000 on the debt. However, the outstanding balance was Dh49,000 in March this year. Despite making regular payments and the card not being used for three years, the amount owed is ballooning quickly. They have been charging a lot in interest and late fees every month from March last year, and have offered no respite despite my situation being the result of Covid-19. I have asked the bank to explain what is going on and requested statements dating back to March last year. What I would like to know is if it is possible to waive the interest and fees charged and put the actual outstanding amount on a 48-month plan with a reasonable interest rate. If this is not possible, can the bank do a 36-month payment plan with a zero per cent interest rate, which I have seen other banks do? Banks are receiving interest-free funds from the UAE Central Bank under the Targeted Economic Support Scheme and I do not understand why this generosity is not being extended to customers. Can you advise me on what I should do? WA, Dubai As you are discovering, credit card debt is dangerous if you fail to pay off your balance in full each month. The high interest rate and late fees make it balloon until the new balance is well above what you originally owed. It is not clear what the interest rate of your previous restructuring was. This is important, so you can understand whether you still have “card-like” debt with high interest rates or debt that is similar to a personal loan, where rates are below a 10 per cent reducing rate each year. I would say your new restructuring is still in the card-like danger zone, with 1.79 per cent a month being well over 20 per cent a year, especially if you cannot make the full payment on time each month. You are right to ask for statements and understand exactly what is going on. Insist on this. Ideally, what you need is a debt consolidation loan, especially if you have other debt elsewhere, that will restructure the loan to a much lower interest rate. You will need a minimum salary of Dh7,000 to Dh8,000 for this. Try to talk to someone in the loan department who is senior enough to make decisions, ideally in person, and show them what you earn and how much you can afford to pay. Document all interactions with the bank. If the bank refuses to provide you with statements or the ability to restructure the loan after 30 days, you can contact the UAE Central Bank’s Consumer Protection Department, either online or in person at their Dubai branch. Before taking such action, you should ask other banks if they are willing to take over the debt in the form of a personal loan or at least lend you part of the balance, so you can pay off a big chunk of your debt. The aim here is to reduce the interest rate while ensuring your monthly payment is not too high. Meanwhile, whatever you can do to raise additional income, such as selling assets or borrowing from your family, will help you pay off chunks of your balance faster. The Tess programme provides flexibility for each bank to decide which customers receive relief and how this applies to their outstanding debt. The UAE Central Bank gives banks access to funding for this programme at zero cost, although the size of funding available to each bank is different. This leads to some banks being more generous to retail clients than others, depending on their access to funding and concerns about how many of their loans will not be paid back, the stability of their overall balance sheet and their liquidity, which is how easily they can meet sudden demands for cash. If you have not applied for a Tess payment deferral, then you should request one to take the pressure off. This varying response to the programme by banks gives you all the more reason to talk to as many lenders as possible to assess if another bank has a reasonable solution for you. These are challenging times and I am glad that you remain conscientious about managing your finances. As you have highlighted, banks in the UAE, along with support from the UAE Central Bank, have introduced various programmes to support customers affected by the pandemic. For instance, most banks introduced loan moratorium options to give customers immediate relief on their monthly loan instalments. Some others also provided relief measures on card repayments, account balance requirements and in other areas. In addition, some banks have gone the extra mile and offered additional attractive debt-restructuring programmes. I would recommend that you approach your bank to discuss the restructuring of your debt. Debt restructuring would allow you to convert your credit card debt into a personal loan, which could have a tenor of up to 48 months and would carry a significantly lower interest rate. This solution would substantially reduce your monthly instalments and help you manage your finances better. Given that you are keen to repay the outstanding amount owed and are currently employed, I am confident that the bank would support building an appropriate plan to accommodate your financial position and help to set a repayment plan within your payment capacity, especially given the current scenario. I hope that your financial situation returns to normal soon, so that you can plan to pay off the loan earlier than scheduled. Can you arrange a consolidation loan with another bank? This would be a cheaper alternative to a payment arrangement on your credit card and would provide clarity on your total cost and monthly payments. You can probably extend the term of the loan to allow for an instalment that you can afford to consistently pay each month. Credit cards are the most expensive form of debt and as you have experienced, the debt can multiply very quickly if the balances are not paid in full. This is a very common misunderstanding that people have when using credit cards. They are only a good financial tool if the balance can be paid off in full each month. If not, they can cause long-term expensive and stressful financial damage. Lenders charge large fines if the minimum balance is not paid and interest is compounded daily, so you are paying interest on the card balance plus the fines and the previous day’s interest. You could also try to apply to other banks for a balance transfer. As you mentioned, some offer zero per cent interest for up to 12 months but most charge an administration fee to facilitate the arrangement. This is a good option only if you can afford to pay the debt off in full within 12 months. If not, you will likely find yourself in the same situation in a year’s time, with high credit card interest rates making it difficult to clear the debt. Did you formally submit a request for relief under Tess? If not, you can do so now. But I would caution, most banks only offer this for a limited amount of time after the event that caused the job loss or income reduction. 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: 'I haven't used my credit card for three years but the amount I owe on it is ballooning'

The Dubai resident's bank agreed to a settlement plan but the instalments and interest rate are too high now that he is on a lower salary