The Debt Panel: 'Will I jeopardise my credit score if I apply for multiple loans?'
The Ajman resident wants to repay a relative who lent him money to cover medical bills in India
I have not had any liabilities for two years but I now want to borrow Dh100,000 to Dh150,000 to cover some medical expenses. I recently had two spinal surgeries in India and borrowed from a family member to pay the bills. I have worked as an IT administrator for an Abu Dhabi company for over 13 years and earn Dh9,200 a month. I have lived in the UAE since 2003 and work between Abu Dhabi and my home in Ajman. My monthly expenses come to Dh5,100 and include Dh2,000 for rent, Dh500 for utility bills, Dh300 for my phone, Dh800 for school fees and up to Dh1,500 for expenses in India.
Before applying for any credit, I checked my credit score at Al Etihad Credit Bureau and it was 720. However, this month I have applied for a credit card and for loans from several different banks. If I apply to several banks for credit in the same month, will my score be reduced or affected in any way? I need to understand what the best steps are for applying for a loan to ensure my credit score won’t be jeopardised. IM, Ajman
Debt panellist 1: Ambareen Musa, founder and chief executive of Souqalmal.com
For starters, your current credit score is pretty good. That actually increases your chances of getting a lower than average interest rate on bank loans. Not just that, a high credit score will also help you qualify for a higher loan amount or higher credit limit and allow you to close the loan or credit card application with lesser paperwork. And because a good credit score comes with these perks, it is in your best interest to maintain it.
Multiple credit applications not only signal desperation on the borrower's part but they will also put you in a higher-risk category.
Ambareen Musa, Souqalmal.com
Credit reporting has taken off in the UAE in the last few years, and banks now look at a potential borrower's credit history when evaluating applications. It is smart of you to consider credit score implications of loan and credit card application. However, it would have served you better to do so before filing the applications.
To answer your primary question: yes, multiple credit applications will affect your credit score. Here's how: as with standard credit reporting, every loan or credit card application will prompt the bank to raise an 'inquiry' into your credit report in order to evaluate your credit worthiness. These inquiries or checks get listed on your credit report, and are also visible to other lenders. Multiple credit applications not only signal desperation on the borrower's part but they will also put you in a higher-risk category. Every additional credit inquiry will chip away at your credit score.
However, it's not all bad news. Although it is not presently clear exactly how many points you lose to such instances in the UAE, global examples show that the impact is minimal and temporary. As long as you're not overburdened with debt and are able to keep up with your monthly repayment schedule, you shouldn't have too much to worry about.
To avoid this situation altogether, it would be a better idea to evaluate your credit options by comparing and researching products and their eligibility criteria before applying. Not only will this reduce the negative impact on your credit score, but it will also save you the time and effort spent on filling out multiple applications.
Debt panellist 2: Philip King, head of retail banking at Abu Dhabi Islamic Bank
Based on the information provided, you meet the guidelines of the Central Bank of the UAE for the amount you wish to borrow. Please be mindful of the fact that a personal loan should form the backbone of your borrowing and you should seek a loan with a long tenor, spreading the repayments over a 48-month period to minimise any strain on your financial position. However, remember that credit cards are not a long-term borrowing solution. While they can be very useful for day-to-day spending, you should take care and always try and pay off the full amount at the end of the month.
I’m not sure why you are applying for loans at different banks at the same time. It would be far more straightforward for you to go to one bank, particularly the one to which your salary is paid, requesting the full amount. This would simplify your repayment schedule, and they are also more likely to accept your application as they have a clearer picture of your financial situation. In any case, there is a negative impact on the score if there are multiple credit bureau inquiries raised on the same customer by different banks in a short span of time. Given this, you should be patient and wait for a bank’s decision before turning to another bank. This will also help to avoid a situation where you end up borrowing more than you can afford to pay back.
Debt panellist 3: Steve Cronin, founder of DeadSimpleSaving.com
You have the opposite problem to most people who write to The Debt Panel. Take some time to read previous questions – their lives have been crushed by their debt. Often these debts have started with an expensive medical procedure, illness or other bad luck. I don’t want you to end up like them, so start thinking differently.
The worst thing would be to move this Dh150,000 debt onto a credit card. If you only paid the minimum balance each month, you might find after a year you have paid back Dh50,000, but the balance is still above Dh150,000 and growing.
A personal loan from a bank will also have a high interest rate – unlike a mortgage or a car loan, it is only your salary securing it. Unless you could get some fantastic interest rate below 5 per cent, which is unlikely, your loan is going to be a burden on you for two or more years. If your back problems start impacting your work, or you lose your job, you could find yourself in real trouble.
Instead, you need to negotiate with your family members to pay the loan back. You can even offer to pay a small amount of interest (less than 3 per cent). They may not be happy about this. However, it is to nobody’s benefit in the family if you get loaded down with debt – without it, you will be in better shape to help them out when they have problems.
You can still pay them back fast and with determination. Cut down your expenses as far as possible, sell any assets you don’t need, take on any kind of extra work online or around the community to generate more income. If you have been with the same company for 13 years, are you sure you are getting paid market rates? The sad truth about loyalty is that you usually end up being underpaid. Ask for a raise, promotion or extra work – your family needs you to be bold here. Or consider changing companies – look out for other jobs that may pay better.
It is much better to be in debt to your family than a bank. Work hard and pay the debt off in whatever creative ways you can think of. But do not place a millstone around your neck by taking on high-interest loan or card debt.
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 firstname.lastname@example.org
Updated: April 16, 2019 04:16 PM