Let's face it: New Year's resolutions are about as effective as cap guns against Godzilla. Whatever the statistics may say about their usefulness - and they're scanty at best - we've all made and broken them, the latter with much more frequency than the former. Some studies suggest that about half of people keep their resolutions at the six-month mark, but I'm guessing based on previous experience at the gym (the New Year's bulge seems to taper off by early March) that the realities are much harsher. Resolve to get fit this year? I'm giving you two weeks, max.
While the most popular resolutions centre around health - quitting smoking, losing weight or joining a health club - bad financial habits also commonly appear on the resolution radar. Mainly, people seem to want to get out of debt. Most of them will fail to do so. Ironically, the trouble with debt isn't that it's especially hard to pay off. With a year of dedication, getting rid of borrowings that amount to even 20 or 30 per cent of your annual salary is very possible, providing that housing costs aren't too high and expenses can be reined in elsewhere. By drafting up a debt-destroying plan and sticking to it, even humongous debt piles can be whittled away, given enough time and sacrifice.
Yet despite the obvious fact that most debts can be repaid and default avoided, few people manage to do so - at least not in short order. That can be traced to the behaviours that get people deep into debt in the first place, which include spending to keep up with wealthier friends, an addiction to shopping and a general inclination to live beyond one's means. Habits like these are hard to break when they become part of a lifestyle; by the time they get woven tightly into everyday life giving them up equates to ditching a major source of pleasure.
The point is that while debt reduction is an easy financial goal in theory, practice tells a different story. For many people, debt is an intractable problem that no amount of planning and resolution can ultimately defeat. An addict may go through a debt-cleansing exercise one year, only to take up the habit again the next. Ridding oneself of debt often becomes an excuse to accumulate debt anew. One of the sad and nefarious effects of the modernisation of finance has been the increasing ease with which a debt addiction can be fed. Half a century ago, credit cards didn't exist, and few people had borrowings outside of a credit line at a local grocery store and possibly a mortgage. Nowadays, financial engineers are busy dreaming up ever-easier ways to pay for things, preferably on credit.
Radio frequency scanners now allow customers to make purchases at some shops in the UAE without even swiping their cards. With the advent of easy-to-use online payment systems, it has also become a breeze to rack up debt in internet spending sprees. Against this backdrop, it's not hard to see why so many people have dug such a big debt hole using credit cards. It's easy. And with few checks in place in the UAE to prevent people who are already in debt from signing up for new credit cards and personal loans, it's no surprise that a large number of people in this country are in it up to their elbows. The financial crisis, which has resulted in redundancies and salary decreases at many firms, has helped to expose the problem. A substantial portion of the prison population here is composed of debt defaulters.
Clearly, a lot needs to be done on the regulatory and legal fronts to prevent banks from extending too much credit to customers. A credit ratings agency already exists in Dubai, but not all banks have signed up for its services, limiting its usefulness. Routine prison terms for defaulters are also under the microscope, an encouraging sign considering that throwing people in jail isn't good for the Government or for banks.
Keeping people in jail is costly for the Government, while a customer behind bars isn't able to earn money to pay off accumulated debts. The punishment doesn't serve as much of a deterrent, either: the lion's share of the population is expatriate, and many will flee the country rather than face up to a debt-related prison sentence. Banks also bear a measure of responsibility for the problem. Credit cards are one of their most profitable lines of business, a fact that entices them to extend credit wherever they can, but at the same time raises systemic default risks.
Lately, some banks have created in-house counselling services for people on the verge of default in an effort to prevent debt flights - what bankers refer to as "skips". These won't solve the problem, but they at least try to skirt it while laws and regulations get up to speed. Consumers, of course, are also to blame for getting into debt. They made the purchases, after all. But with the high interest rates on credit cards in the UAE - close to 40 per cent per year, in most cases - racking up large bills on cards is completely nonsensical. With rates that are astronomical, they can only lead to ruin. The only ways in which any rational person should use a credit card issued by a bank in the UAE are to make payments where cash isn't accepted and in case of emergency.
So instead of resolving to pay off credit card balances this year, tackle the behaviour that leads to debt. Resolve not to use those shiny plastic cards at all. afitch@thenational.ae
