It can be all too easy for residents in the UAE to fall into the luxury lifestyle trap, which can be, relatively, easily funded by the numerous credit and loyalty cards on offer here. Of course, the top financial priority of the majority of individuals is to be clear of, or at least successfully manage, debt. But misusing credit cards, which are often the most expensive forms of debt, particularly with such high rates of interest, can put paid to this noble ambition. Although credit cards can be an extremely useful tool, it’s also very easy to run up huge bills, especially taking into account the ease at which they can be acquired.
Advantages
Credit cards offer immediate access to funds. Available credit can often be invaluable in cases of emergency or unforeseen expenses, allowing flexibility to pay over time. Security is a significant advantage to credit cards. Should you lose it, or your wallet is stolen, the card can easily be cancelled and replaced. This can be especially important while travelling. Lose cash and it’s gone for good.
Individuals also gain more protection with a credit card, than using cash, cheques or debit cards. If a purchase is faulty or a company goes into liquidation, money spent can, in most cases, be claimed back from the credit-card provider. Credit cards associated with rewards programmes can earn the user substantial benefits, such as air miles and luxury gifts. Card statements can be a big help when it comes to budgeting, by offering an itemised account of monthly expenditure.
Disadvantages
The most important thing to remember is a credit card is a form of borrowing. If you don’t pay off the full balance amount each month, then interest will accumulate at a considerably high rate. This could result in debt spiralling out of control. Another thing to watch out for is concealed costs. It’s not only interest rates. There are often high annual fees, as well as charges as a result of late or non-payment. A charge will also be made if users go beyond their credit limit.
Drawing cash from credit cards can be a major mistake. As well as a withdrawal fee, interest will immediately begin to accrue, as there is no interest-free time period when taking out cash.
Credit availability can be misleading and encourage overspending, as it can often be too simple to lose track of outgoings. It can also lead to a false sense of security, allowing people to believe they will be able to repay debt in future, when, in fact, this may not be the case.
Managing debt
Taking into account the advantages and disadvantages of credit cards, the most important thing is to be honest with yourself regarding the management of credit-card debt. If an increasing amount of your salary each month is being used to repay credit-card loans, this could lead to serious financial problems down the line. It’s essential to get on top of the situation as soon as possible. This is no place for a head-in-the-sand mentality.
Repayments
Although minimal monthly payments can seem an attractive prospect initially, it could take years to repay the debt. During this time, an exceedingly high amount of interest will be charged. Ideally, the full amount should be paid every month. If this isn’t workable, then set a robust repayment plan in place in order to settle the debt as quickly as possible.
Top priority
Living in the UAE, the majority of people possess more than one credit card. As such, it is crucial to pay off the most expensive one first. The card with the highest fees and/or interest rate should take priority when it comes to repayment, then focus on the next most expensive one and continue from there.
— The writer is a Regional Director of deVere Group, one of the world’s largest financial advisories
