Abu Dhabi, UAETuesday 25 June 2019

The Debt Panel: 'I have the right salary for a loan but not the right credit score'

The Abu Dhabi resident, who already owes Dh52,500 on credit cards, now wants to finance his wedding this summer

Illustration by Mathew Kurian 
Illustration by Mathew Kurian 

I am from India and work as an electrical engineer in Abu Dhabi, earning a monthly salary of Dh12,000. I owe about Dh50,000 on credit cards because my previous employer did not pay my salary on time and I missed some repayments. I also used some of the money three years ago for personal reasons, such as renovating a home.

My debts are:

Credit card 1: Dh23,000 (monthly repayment of Dh800)

Credit card 2: Dh11,000 (monthly repayment of Dh184)

Bank loan on a credit card: Dh14,000 (monthly repayment of Dh810)

Bank loan on a credit card: Dh4,500 (monthly repayment of Dh1,000)

Total: Dh52,500 (Dh2,794)

I am now in a position to take out a loan but my low credit score is making it hard to gain approval from a bank. I have been with the same bank for two years but I am not getting any benefit from this. Banks are here to help and service people and the credit score should only be one criterion for the decision to lend. I have only approached one lender so far and have been turned down.

Due to this, I am facing a lot of problems in my life, particularly with my family. I need the loan for my wedding in July and to solve my father’s financial problems in India. He borrowed money to pay for my two sister’s weddings. My monthly expenses for rent, transport, remittances et cetera, come to about Dh2,500. There is no life without money — I have learnt the hard way. What solutions are available to me?

MH, Abu Dhabi

Debt panellist 1: Ambareen Musa, founder and chief executive of Souqalmal.com

It is unfortunate your delayed salary discharge caused you to miss your scheduled credit card payments. Repayment history unarguably carries the highest weightage in your credit score calculation from the Al Etihad Credit Bureau. Skipping loan instalments and credit card payments will seriously drag your credit score down, with many of these negative entries remaining on your credit report for up to seven years. With banks now taking credit scores into account, a botched-up repayment track record will undoubtedly raise a big red flag.

With some very expensive credit card debt in your name as well as a low credit score, now would be a bad time to consider borrowing more money.

Ambareen Musa, Souqalmal.com

In hindsight, your missed card repayments could have been avoided altogether if you had an emergency fund saved up earlier. An emergency fund is like a financial backup plan to help you keep up with your financial commitments in times of crisis, such as an unexpected job loss or health complications. It's a good idea to stash away at least three to six months worth of your expenses in cash, savings accounts or deposits to help you stay afloat in financially difficult times.

With some very expensive credit card debt in your name as well as a low credit score, now would be a bad time to consider borrowing more money. You'll find the only lenders willing to offer you a personal loan at this point will lend at high interest rates and offer unfavourable loan terms.

Going by the monthly credit card repayment and living expense figures you've provided here, you're still saving about Dh7,000 or 58 per cent of your salary every month. The ideal choice would be to use this extra cash to settle your outstanding credit card debts, and the sooner the better. However, as you're in desperate need of money, you could use your monthly savings to meet your financial commitments back home. However, keep making the minimum payments towards your credit cards in the meantime. Then, as soon as you've met your immediate obligations in India, start using your savings to pay down your credit cards. The longer you drag your credit card debt along, the more difficult and expensive it will become to repay.

Also, approach your primary bank as well as other banks to request a debt consolidation. Consolidating all your expensive credit card debts into one loan could help lower your interest costs and provide you with a fixed loan term to systematically pay off the balance. Your current credit score may make it difficult to get such a loan but it is definitely worth a try.

Debt panellist 2: Philip King, head of retail banking at Abu Dhabi Islamic Bank

It is encouraging that you are keeping track of your finances and are aware of the dangers of taking on too much personal finance.

I can see that you have many worries, not just about your own finances at a pivotal time in your life, but also about your father’s finances.

It is important to take positive action, in a step-by-step approach, to prevent these issues overwhelming you. Focus on what you can do, rather than things that are beyond your control.

At this stage, your monthly repayments should be manageable, but you should try to reduce the burden. Firstly, deal with the liabilities on your two cards. As you are currently repaying only the minimum amount on the two cards, the charges will start to mount and your repayment burden will increase quickly.

Try to pay back more each month than you are currently doing; this will mean a short-term sacrifice, but will help you to avert more serious problems in the coming months. You should also talk to your bank about taking a consolidation loan to cover your credit card obligations, and possibly your other loans too. This would help reduce your monthly repayments to more manageable levels, potentially over a longer time frame.

I advise you to avoid trying to take on more debt at this time, as it will only make your problems worse in the long run. It is much better to put away some money aside every month in savings, even if it means taking some very difficult decisions on how you live.

Getting married is life-changing, and I am sure it will be a joyous occasion for your families. It is best for you to be as practical as possible about the wedding arrangements, and start your new life together in good financial health.

Debt panellist 3: Rasheda Khatun Khan, founder of Design Your Life

Being in debt is not easy and life can get very hard without money. So taking care of your finances is incredibly important and that responsibility lies with you. Banks can certainly offer financial assistance by way of loans and credit cards but it is always at their discretion. Relying on the bank to relieve you of your financial pain can only be an option if you are eligible.

You need to take a deeper look at the reasons for your new loan requirement. Based on your current salary and debt, you are not able to afford to increase your debt. The best solution would be to use what disposable income you have towards clearing your credit cards. I realise this does not solve your father's debt problem or your current need for your wedding, but it will strengthen your financial future.

Increasing debt to pay off another debt or to pay for expenses you cannot afford will get you into deeper financial trouble. You have to prioritise. Explain to your father you are not in a position to support him right now, as this will simply place you in a difficult financial position. Consider delaying the wedding to give you time to save up for it. Starting a marriage in financial stress will only burden or even jeopardise a new relationship.

Rethink your plan. Instead, apply for a consolidation loan to wrap up all of your current debts and start saving the rest of your income. Avoid taking on extra commitments as you simply cannot afford it.

The Debt Panel is a weekly column to help readers tackle their debts more effectively. If you have a question for the panel, write to pf@thenational.ae

Updated: June 11, 2019 09:29 AM

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