Our panel of experts question why banks approved such high levels of credit for the Dubai resident
The Debt Panel: Customer service agent earning Dh6,000 built up Dh200,000 in debt investing in a friend's business
I need your assistance regarding my financial situation. I am a customer service agent from Senegal and my salary is Dh6,000, though I sometimes work overtime, earning an extra Dh2,000 or Dh2,500 some months. I currently have four credit cards and one loan. The loan and one of the credit cards are from the bank my salary is transferred to. I built up the debt after trusting a friend and investing in a used tyre business. At first, everything was OK and then he sold the business and moved to Europe and I got stuck in debt and had to face it alone. While most of the debt, which I took on in 2015 and 2016, was from the business, some of it comes from me sending money home to support my family. I usually make the payments on time, but I have missed some recently and all of the cards are over limit as a result. The debts are:
Credit card 1: Dh18,000
Credit card 2: Dh8,000
Credit card 3: Dh50,000
Credit card 4: Dh47,000
Personal loan: Dh70,173
The last card I did not even apply for. One of the sales representatives called me one day to tell me I was eligible for their new consumer card and that I was not required to send any documents.
Now I am receiving calls every day from banks threatening to file a police case. I have stopped contacting banks myself because most are not willing to help out due to my bad credit history. As to my monthly expenses, from my Dh6,000 salary I send Dh1,200 to my wife and kids every month, pay Dh1,500 for a shared room and the loan repayment is Dh2,192. I just about manage transport and food. I am looking for a bank that will offer a consolidation loan to close up the credit cards. MD, Dubai
Debt panellist 1: Philip King, the head of retail banking at Abu Dhabi Islamic Bank
On the basis of your salary, you are eligible for a maximum financing of Dh120,000 (20 times your monthly salary), which is far less than your current outstanding liabilities, which amount to Dh93,000. So banks are very unlikely to give you a consolidation package at this stage. Moreover, because of your repayment history, it is difficult for banks to extend new financing.
What is curious to me is how you were approved for cards with credit limits this high when you have a salary of Dh6,000. Banks should always check a customer’s full credit history and evaluate personal circumstances and ability to manage finances before issuing financing. Central bank regulations also require that banks check the individual’s status with the Al Etihad Credit Bureau (AECB) to evaluate the existence of outstanding liabilities, including cards.
In your case it seems this process was either not carried out by your lenders, or your history was ignored. However, it is also possible that if you applied for multiple cards or financing within one month, your situation would not have been clear to the banks as AECB reports are shared between banks on a monthly basis.
Most concerning is the last case you mentioned. If the bank did indeed issue you a card without doing any checks or requesting any paperwork, as you stated, it has violated Central Bank regulations. With your pre-existing obligations you should not have been offered an additional card.
It is important for you to show to your banks that you have done all you can to make repayments. This could be through selling assets to raise funds, or moving into cheaper accommodation.
Finally - and I am sure you know this now - it is important to avoid trying to fund any business ventures with sources of finance, such as cards, which are really designed for short-term transactions.
Debt panellist 2: Ambareen Musa, founder and chief executive of Souqalmal.com
You mention that the majority of the debt is a direct result of investing in a failed business run by your friend. This was a bad decision with red flags marked all over it, particularly as you took out a personal loan and racked up credit card debt to invest in a business that wasn't even owned by you. To make matters worse, this has also severely affected your credit worthiness.
Now you're stuck with Dh193,000 worth of total debt, which is 32 times your fixed monthly salary. Debt consolidation isn't an option for you because your debt-to-income ratio is far above the stipulated 50 per cent. Instead, get in touch with your banks to request for a restructured payment plan for your debt. This could involve converting your outstanding credit card balance into a fixed-tenure loan, a reduction in interest rates or a waiver of late payment fees.
Since you manage to earn a significant amount in overtime pay, it would also be a good idea to use that money for settling your debts. Try following a systematic debt repayment strategy to help you get out of debt faster. Either start with the debt stacking approach, where you pay off the debt with the highest interest rate first, or follow the debt snowball method - where you pay off the smallest debt first, leaving you with fewer debt obligations.
Is your wife working back home in Senegal? Can she take up temporary employment, at least until you pay off your outstanding debt in the UAE? If this is an option, you can redirect the funds you remit to your family towards repayment of the loans and credit cards.
Alternatively, do you own any assets such as property, gold or hold other investments that can be liquidated? Doing so will give you access to some extra cash to settle your debts here.
Debt panellist 3: Rasheda Khatun Khan, a wealth and wellness planner
Consolidating debts into a loan really is only part of the overall solution. The real issue to address here is your budgeting strategy. While borrowing on credits cards is one of the easiest ways to access funds, it is also the most expensive.
If you find yourself not being able to pay your credit card balance off after two or three months then you have a problem. If the amount you owe is also increasing each month, then you have a larger problem and soon you will find yourself in a huge pile of debt. The solution here is not to find a loan to consolidate, rather to review your monthly expenses and drastically reduce.
If you find by downsizing in every area of your life that you are still not able to manage on a monthly basis, and you are not able to get a pay rise or a higher paid job, then it is time to consider if living here really works for you.
There is no magic bank that will take away your debt, you still have to repay it. With any debt, you must be able to afford all your repayments as well as your monthly expenses. If this is something that cannot be achieved on a consistent basis, then the cycle of debt will continue and you find after a period of time, another consolidation loan is needed.
To consolidate your current cards, first try the banks they are held with. The bank may offer the loan as they already have the debt. Then negotiate with the secondary banks.
Be prepared to liquidate any assets you have that are not yielding returns that are equal to the interest rates you are paying on your cards. It's time to seriously cut back.
On this panel this week: Philip King, the head of retail banking at Abu Dhabi Islamic Bank; Ambareen Musa, founder and chief executive of Souqalmal.com and Rasheda Khatun Khan, a wealth and wellness planner and founder of Design Your Life
The Debt Panel is a weekly online column to help readers tackle their debts more effectively. If you have a question for the panel, write to email@example.com.