x Abu Dhabi, UAEMonday 22 January 2018

UAE residents risk maxing out credit cards to make loan payments

A UAE new study has found many are exposing them to interest rates around seven times higher and leaving many customers close to maxed out.

A new survey has found cash-strapped residents in the UAE are using their credit cards to pay their loan obligations. Joe Raedle/Getty Images/AFP
A new survey has found cash-strapped residents in the UAE are using their credit cards to pay their loan obligations. Joe Raedle/Getty Images/AFP

Hundreds of UAE residents are using credit card debt to make payments on personal loans, exposing them to interest rates about seven times higher and leaving many customers close to maxed out, a new study has found.

An online survey from compareit4me.com, a UAE-based price comparison website, polled 1,832 people on their consumer finance habits, finding that 20 per cent made use of a credit card to cover repayments on a personal loan or car loan within the past six months.

A total of 37 per cent of those polled said they had three or more credit cards, and among that group more than half said they had used up 90 per cent of their available credit.

“The results found in the survey were a big concern,” said Tom Davies, the operations manager at compareit4me.com.

“We found worrying trends with large portions of the respondents; trends which meant people were accumulating debt quicker than they could afford.”

Official consumer prices rose 1 per cent in May compared with the same month a year earlier. However, housing costs have risen at a much faster rate across the UAE – putting the squeeze on many consumers.

Although some customers had made use of interest-free balance transfers to lower their debt repayments, many soon found themselves utilising both credit cards and further building their debt loads, the survey found.

The findings point towards a large number of borrowers who spread personal debts across multiple banks.

Identifying these customers so that banks can make more informed decisions about who to lend to is one of the primary objectives of the Al Etihad Credit Bureau, which is due to start operational trials this month. Making use of expensive credit card debt to pay cheap personal loans “doesn’t make sense”, said one retail banker who asked not to be identified.

Customers who have taken out multiple credit cards may be forced to change their behaviour as the Al Etihad Credit Bureau becomes fully functional and some banks opt not to extend credit lines to those who have borrowed far beyond their means, the banker added.

Interest rates on UAE credit cards are significantly higher than many countries and other types of debt. The average monthly percentage rate on a UAE credit card was 2.9 per cent at the start of this month, equivalent to an annual rate of 41.1 per cent, according to data from souqalmal.com.

That compares with an average interest rate on personal loans of 6.1 per cent.

A credit card balance with an annual interest rate of 41.1 per cent will double every two years if the principal is not paid down.

A total of 42 per cent of respondents to compareit4me.com’s study said they made only the minimum payment on their credit cards and did not pay down the principal, with 45 per cent saying that monthly debt repayments were beyond their means.

ghunter@thenational.ae