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UAE: Rising interest rates, household bills; how to avoid credit card debt

Credit cards can be powerful financial tools when used wisely, but beware of the pitfalls

As the UAE and the rest of the world rapidly progress towards a cashless society, the credit card — physical or virtual — remains the basic component of the financial system.

Credit cards can be powerful financial tools when used wisely, offering convenience, rewards, and the ability to build credit. However, without careful management, they can also lead to significant debt and financial stress.

As of mid-2024, credit card debt in the UAE continues to be a significant concern for many residents, reflecting broader economic trends and consumer behaviour. As the interest rates in the country continue to stay high, this automatically has a major impact on credit card debt. The high interest rates makes it more costly for consumers to carry balances on their credit cards, potentially exacerbating debt issues.

According to CEIC data, domestic credit in the UAE reached $418.9 billion in February 2024, compared with a reported figure of $408.2 billion in the previous month.

Average consumer debt in the UAE reached $95,000 per household, or $114 billion in total, according to a regional study by research firm Strategic Analysis. Household debt in the UAE has been steadily increasing, mirroring global trends of rising consumer debt. This includes various forms of borrowing, with credit card debt being a significant component.

The increase in interest rates and household debt highlights the importance of careful financial planning and management to avoid falling into debt traps. Understanding credit scores, the implications of defaults, and the latest banking measures can help residents navigate their financial responsibilities more effectively.

Here are practical strategies to help you avoid falling into the trap of credit card debt.

1. Create a budget and stick to it: A budget is the foundation of sound financial management. Begin by tracking your income and expenses for a month to understand where your money is going. Categorise your spending into essentials (like rent, utilities, and groceries) and non-essentials (like dining out and entertainment). Allocate a specific amount to each category and make a commitment to stick to these limits. Using budgeting apps can make this process easier and more effective.

2. Use credit cards for essentials only: One of the best ways to avoid accumulating credit card debt is to use your credit card only for essential purchases, such as groceries, gas, and utility bills. Avoid using credit cards for discretionary spending, such as shopping for clothes or dining out, unless you are sure you can pay off these charges in full when your bill arrives.

3. Pay your balance in full each month: Paying your credit card balance in full every month is crucial to avoiding interest charges. If you can’t pay the full balance, aim to pay more than the minimum payment. This reduces the principal balance faster and decreases the amount of interest you’ll pay over time. To ensure timely payments, set up automatic payments or reminders.

“On-time payments are the golden rule of credit card ownership. But missing a payment can seriously damage your credit score, the three-digit number that lenders use to assess your creditworthiness. This score plays a crucial role in your financial life, impacting everything from qualifying for loans (mortgages, car loans, etc) to the interest rates you’ll be offered,” an insurancemarket.ae blog post stated.

4. Avoid cash advances: Cash advances on credit cards often come with high fees and immediate interest charges, usually at a higher rate than regular purchases. To avoid these costly fees, refrain from using your credit card for cash advances. If you need cash, consider other options like a personal loan with lower interest rates.

5. Be mindful of introductory offers: Credit card companies often entice new customers with attractive introductory offers such as zero per cent interest on purchases or balance transfers. While these offers can be beneficial, they are temporary. Make sure you understand when the introductory period ends and what the interest rate will be afterward. Plan to pay off the balance before the regular interest rate kicks in to avoid unexpected high charges.

6. Understand your rewards programme: Your credit card may offer rewards or cashback, so it’s important to familiarise yourself with the terms and conditions. In doing so, you will be able to utilise rewards that align with your purchasing habits and monthly budget. Contact your bank to clarify the rewards and terms and conditions.

7. Limit the number of credit cards you have: Having multiple credit cards can make it easy to lose track of your spending and accumulate debt. Limit yourself to one or two credit cards that best meet your needs. This makes it easier to manage payments and keep track of your spending.

8. Monitor your credit card statements: Regularly reviewing your credit card statements helps you stay on top of your spending and identify any unauthorized charges. Early detection of fraudulent activities can save you from potential financial losses. Additionally, reviewing your statements can help you spot spending patterns and adjust your budget accordingly.

9. Build an emergency fund: Unexpected expenses can force you to rely on credit cards if you don’t have a financial cushion. Establishing an emergency fund with three to six months’ worth of living expenses can provide a safety net, allowing you to cover unforeseen costs without resorting to credit cards.

10. Seek professional advice if needed: If you find yourself struggling with credit card debt, don’t hesitate to seek professional advice. Financial advisers or credit counseling services can provide guidance and strategies tailored to your situation. They can help you create a debt repayment plan and offer tips on managing your finances more effectively.

Conclusion

Avoiding credit card debt requires discipline, planning, and mindful spending. By creating and sticking to a budget, using credit cards responsibly, and being proactive about your financial health, you can enjoy the benefits of credit cards without the burden of debt. Remember, the key is to treat credit as a tool, not as a source of extra income. With the right approach, you can maintain financial stability and peace of mind.

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