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Sam Wani, the general manager of the mortgage adviser Independent Finance, urges extreme caution when signing up for a credit card.”If customers want to apply for a credit card, they can do it easily, and if they want multiple credit cards, they can get multiple credit cards. There's no credit bureau, so it's difficult for banks to know who they are lending to,” he says. Daniel Acker / Bloomberg
Sam Wani, the general manager of the mortgage adviser Independent Finance, urges extreme caution when signing up for a credit card.”If customers want to apply for a credit card, they can do it easily, and if they want multiple credit cards, they can get multiple credit cards. There's no credit bureau, so it's difficult for banks to know who they are lending to,” he says. Daniel Acker / Bloomberg

Don't get sunk by debt in the UAE

It has never been easier to get a loan or credit card, or several should you so desire. But the ease with which lenders dispense their 'largesse' can hide hidden costs. It pays to read the small print

With personal lending on track to double this year, alarm bells should be ringing.

But it seems the lessons of the financial crisis are no longer at the forefront of consumers' minds, as personal borrowing hit more than Dh270 billion in the first five months of this year.

The problem, experts say, is a combination of consumerism, poor financial literacy, readily available high levels of credit and clever tricks played by banks to lure people into borrowing as much as they can afford, and sometimes more.

"The regulation is a bit lenient," says Sam Wani, the general manager of the mortgage adviser Independent Finance, who urges extreme caution when signing up for a credit card.

"If customers want to apply for a credit card, they can do it easily, and if they want multiple credit cards, they can get multiple credit cards. There's no credit bureau, so it's difficult for banks to know who they are lending to."

The Government is in the process of establishing Al Etihad Credit Bureau to provide data about individual debtors. It was due to start operating this month and would essentially provide to banks a credit score of borrowers to help them to balance their risk. At the moment, a customer with one credit card that is paid off every month may look low risk, but it is possible that he owes millions of dirhams on credit cards to other banks.

After the 2008 financial crash, the Government introduced rules to try to prevent another disaster on that scale. One of these, Mr Wani explains, is a credit ceiling, which is supposed to prevent banks from giving credit to clients who spend more than 50 per cent of their income servicing existing debts.

"They are supposed to be looking at all these things, mostly when it comes to mortgage lending," he says. "But this doesn't necessarily apply to the smaller debts.

"As mortgage advisers we have to make sure our clients don't get into debt. Most of our clients we talk to have two or three credit cards. We always advise them to cancel all but one.

"People usually have multiple cards because they are easily available and because of the promotions, the freebies attached to getting the credit card."

A compareit4me.com survey this month corroborated this theory and revealed that almost four people in 10 surveyed had three or more credit cards, and half of these people said the cards were almost all near their credit limits.

One of the most common pitfalls, according to the survey, was the trap of transferring debt from one card to another in an attempt to take advantage of a better rate or special promotion, then continuing to use both cards.

"There are 51 banks offering hundreds of different kinds of products," Mr Wani says. "Almost every credit card carries one promotion or another. But fundamentally it boils down to the individual. He has the choice. You can't over-regulate, because you are clamping down on choice and the free market goes away."

Using debt to reduce the balance of another debt is another common money pitfall. The compareit4me.com survey revealed that one person in five was resorting to using a credit card to make personal-loan repayments.

A sizeable 42 per cent admitted to making only the minimum payment on their credit cards each month. This is often a lot more expensive than people realise.

Taking into account compound interest, a debt balance of Dh100 on a credit card with a monthly finance charge of 3 per cent will increase to Dh142.5 by the end of the first year, and Dh203 by the end of the second, if only the minimum monthly payments are made. So 3 per cent is not 36 per cent a year, it is 42.58 per cent.

Taking out credit cards and simply multiplying the monthly rate by 12 is a common and dangerous mistake, Mr Wani says. It is not a representative figure.

In other countries, such as the UK, it is a legal requirement for any advertising of credit to include an APR, or annual percentage rate, which takes into account all charges associated with a product, in addition to the interest rate. This allows people to much more easily work out how their debt can grow.

In the UAE, however, there is no such requirement and banks much prefer to advertise very low monthly figures. It is down to the customer to push for an APR when applying for a credit card or loan.

"If you take a credit card, or you take many credit cards, you need to look at the annual interest, not the monthly. If the bank says 2 per cent, that means 24 per cent a year, but that's not including any charges or costs associated with acquiring that liability," Mr Wani says.

"If you are making a minimum payment you're paying a little bit of the principal and most of the interest. It's not the right thing to do. You can't pay off the outstanding. You must clear the balance every month. This is the only thing to do."

It is always worth checking whether the minimum payment includes only the interest, or also some of the balance.

A quick search of the internet gives a huge number of websites that will calculate an annual compound interest rate using the monthly figure offered by banks.

Despite the monumental financial crash in 2008, it seems banks are as keen as ever to encourage spending on credit. HSBC contacted some of its customers this month with a promotion to collect Air Miles when any of its credit cards are used abroad over the summer.

Spending the equivalent of Dh10,000 would earn the customer 40,000 bonus Air Miles. A bigger spend of Dh50,000 would be rewarded with 125,000 bonus Air Miles - which would buy about Dh900 worth of Sharaf DG vouchers from the Air Miles website.

Even the most financially savvy can be bamboozled by the wording in advertisements.

Earlier this month, eye-catching email adverts from the National Bank of Abu Dhabi were offering car loans at "2.49 per cent per annum*". The small print with the * revealed that the "2.49 per cent is for illustration purposes, effective interest rate is 4.72 per cent per annum calculated on reducing loan balance".

Ahmed, a 31-year-old Emirati, had a lucky escape after taking out a mortgage loan to buy an off-plan investment property in Al Raha Beach.

The father of one, who borrowed close to Dh1 million from an Islamic bank, says that although he isn't struggling to pay back the loan, he is "disappointed in the whole system".

"The way the banks operate is not good. When I took the loan they took a security cheque, so I was guaranteeing my own debt. I have a property but they take a cheque, so if it returns they can file a case with the police. This does not make sense."

Ahmed bought the one-bedroom property in the boom in 2008 hoping the rent would cover the mortgage payments of about Dh8,000 a month. Fortunately, he never missed a payment and the property is now leased out.

"I was lucky. But many, many people were not and the banks are also responsible. They do not act in a responsible way here.

"Many people do not read the terms and conditions, and financial awareness is very low. The banks do not explain things here."

His experience with the bank, which offered him no solutions when he approached them to say his property would not be ready on time, has left Ahmed wary of the entire financial system.

"The wife of a friend went for a top-up loan and when she showed her husband what the bank had offered her, he saw she couldn't afford the monthly payments. This is totally wrong. But I have heard many stories like this."

Souqalmal.com, the price-comparison site, reported in March that about three Emiratis in 10 have no savings at all. Half of western expatriates, it said, save between 10 and 30 per cent of their monthly income.

According to Ambareen Musa, chief executive of the site, although banks have become more responsible over the past few years, there is a huge gap in financial literacy, which is particularly a problem when it comes to advertising.

"Consumers need to be aware that all offers and products have terms and conditions to look out for, so ask the bank under what conditions is the offer applicable."

Customers should also pay more attention to the small print when taking on any sort of credit, she says, particularly credit-card fees on international spends, which most people are not aware of.

"Consumers need to build an understanding of how rates are calculated … we also have to remember that advertising is always to incite you to buy, whether it's groceries, clothes or baking products, like in any other country.

"It is, however, our responsibility to educate ourselves on the different products."


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