Tips to help you escape the debt trap

Published November 2nd, 2016 - 09:19 GMT
 Financial advisors and experts offer practical steps and straightforward advice to help you become debt-free. (File photo)
Financial advisors and experts offer practical steps and straightforward advice to help you become debt-free. (File photo)

Countless UAE residents are struggling with debt that has spiralled out of their control. With many owing huge outstanding amounts on multiple credit cards and unsecured loans, the road to being debt-free can seem like a distant dream. 

If you're stuck in a debt trap, remember that it's not a situation that can't be fixed. Financial advisors and experts offer practical steps and straightforward advice to help you become debt-free.

Credit card debt is the worst, get rid of it first and fastest
Credit card debt is no doubt the worst and most expensive form of debt. And the culprit is the steep interest or profit rate on credit cards. Don't let that seemingly small number of 2.99 per cent to 3.25 per cent per month mislead you. When converted to an annual rate or APR, interest rates on credit cards in the UAE can touch a whopping 40 per cent on average! 

Credit card debt is a self-compounding problem, and so many people find themselves struggling with mounting debt on multiple credit cards. So what's a possible solution? 

It may be wise to apply for a debt consolidation loan and convert that pesky expensive debt into a lower-interest loan. You can then repay the debt in regular monthly installments spread over a fixed tenure. 

If all your debt is on credit cards, you could also opt for a salary-transfer loan from your primary bank. This will get you a competitive interest rate, and you can use the loan amount to settle the outstanding amount on your credit cards. Whichever option you pick, make sure you nip the problem right in the bud. Change your spending habits for the better, and don't go down that road again! 

Want to consolidate or restructure your debt, but don't know how to?
Debt consolidation and debt restructuring can sound quite confusing, and even if you understand what it means, you might not know how to go about applying for one yourself?

Debt consolidation involves combining all your existing loans and credit card debt into a single loan, usually done to take advantage of lower interest rates, longer tenures and smaller monthly repayments. This is different from debt restructuring, under which you can approach individual banks to restructure your loans. This may involve extending the loan tenure, lowering the monthly installments or taking a payment break to help you cope with debt repayment.

It is best to speak with the bank right in the beginning if you're starting to drown in debt and don't see yourself being able to keep up with the repayment schedule. A good way to start is by approaching your primary bank first. Since your salary gets credited to this bank, you would likely be able to apply for a salary-transfer loan, or debt consolidation loan if offered by the bank.

In case you're exploring debt consolidation options at other banks, remember that salary transfer would be a mandatory requirement. Also keep in mind that any additional finance would be subject to the 50 percent Debt Burden Ratio (DBR) cut-off. 

If you've exhausted the salary-transfer loan option, and are not eligible to apply for a debt consolidation loan either, you can approach individual lenders to restructure their specific loans and credit cards. 

Get a grip on your finances, try 'Zero Sum Budgeting'
Do you find it difficult to manage your expenses and struggle to save or repay debt every month? If conventional budgeting doesn't work for you, try the zero sum budget. Imagine assigning every dirham you earn, a fixed task - that's the principle behind a zero sum budget. Not only will it help you control wasteful spending, but it'll also help you get out of debt faster.

So, what is a zero sum budget, and how is it different from a regular budget? This budgeting technique leaves you with zero money, once you deduct all expenses from your income. Don't worry, that's not a bad thing in this case! Prioritise your expense categories, with loan repayments at the top followed by basic household expenses and emergency savings, and all miscellaneous spending right at the bottom. The next step is to split your income based on these priorities, without leaving anything behind. 

You can customize this budget as you go. And remember that every dirham counts, when you're on the road to becoming debt free sooner!

by Ambareen Musa 

The writer is the founder and chief executive officer of Views expressed are her own and do not reflect the al bawaba's policy.


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