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Awareness is key to debt reduction

It's too easy to get into debt, and hard to escape it. Slowly, work is starting to help UAE residents understand the basics of debt and saving.

The tax-free incomes offered in the UAE have always been an enticement to live large.

But for too many, Emiratis and expatriates alike, lifestyle quickly rises to match and then exceed the incomes on offer.

The report, published in The National's business pages today, that one in five people surveyed had used credit cards to pay off personal loans is just the latest in a series of unsettling reports about the financially unsustainable way some people are living in the Emirates.

It follows similar reports that average consumer debt is Dh350,000, a figure that has increased fourfold in the last 10 years.

There is, of course, good debt - spending on education and mortgages - and bad debt - splashing cash on cars, holidays and particularly extravagant weddings. But the timbre of the reports suggests that many are unable to differentiate between the two.

Paying off personal loans with credit cards, which involves swapping debt that incurs an annual percentage rate of 6.1 per cent and replacing it with an annual rate of 41.1 per cent, suggests a misunderstanding of even the fundamentals of money management.

One study by the Department of Economic Development in Abu Dhabi found that more than half of Emirati family heads were in debt. For those under 30, more than 70 per cent owed money.

The UAE's authorities are taking steps to deal with this trend. Some initiatives are undoubtedly generous, such as the decision last year to forgive Dh2 billion in commitments held by the most intractably indebted Emiratis.

However, others moves are aimed at preventing residents of the UAE from getting into trouble in the first place.

One is the Al Etihad Credit Bureau, which will share information among banks so that the deeply-indebted cannot simply go to a different bank and get another credit card to continue their unsustainable cycle of spending.

Another is the example of Al Hilal Bank, the Abu Dhabi-based Islamic lender, to team up with Emirates National Schools to teach financial literacy in schools in Abu Dhabi and Al Ain. Similar courses are underway or proposed at the high school and university level.

As with health, prevention is always better than cure.

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