UAE credit card interest rate hikes bite

Published November 6th, 2022 - 12:48 GMT
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Dubai: UAE consumers feeling the pinch from the back-to-back interest rate hikes have one option before the next increase hits in December - settle some of the outstanding debt on their credit cards.


Javed Akberali, co-founder and Chief of Strategy at GoFinance and a former banker said: “And the UAE is a very credit-hungry market… Every fee or charge levied by a bank on credit cards is subject to change at the financial institution’s discretion”, but as per regulations from the UAE Central Bank, banks must inform customers immediately of any change to their prevailing interest rates.


The current market rates are between 3 to 4 per cent per month, said Akberali, adding the worst hit would be those consumers having to pay off their credit card bills as well as mortgage payments. “People on variable rate contracts are primarily in the mortgage space,” he added.



The cost of living has increased because of the increase in interest rates, and mortgage payments represent the highest payment from a person’s expenses.

- Javed Akberali

For example, if an individual earns Dh20,000 per month and the monthly mortgage payment based on a variable interest rate is Dh10,000, the successive UAE Central Bank rate hikes would push the home loan EMIs to as high as Dh12,000. “For that UAE consumer, the remaining disposable income has become Dh8,000 from Dh10,000,” said Akberali.


“Even then, it is not that the individual will curtail his or her spending - they would use their credit card to make up the balance Dh2,000.”


Moreover, every card comes with an interest-free grace period, usually 15-45 days after the purchase. If a consumer does not pay the outstanding amount on the cards on or before the due date or only pays the minimum amount, that’s where the cycle of debt could easily spin out of control.


This is why managing that credit card's outstanding balance assumes such significance. The other option for the UAE consumer also holding a mortgage would be to refinance the deal with another bank on an extended fixed-year payment period.


“Currently, the monthly interest rates range between 2.2-2.8 per cent, on average,” said Neelam Verma, Vice-President and Head of Investments at Continental Group. “So, an increase of 75 basis points makes credit borrowing a considerably expensive proposition.” (Moreover, mortgage EMIs will increase if the interest rates have entered the floating rate phase.)


For new borrowers, it is advisable to look for fixed rates so they can be locked in (for the maximum period, thus safeguarding them from impending rate hikes.

- Neelam Verma

Shivansh Rachit, board member at Hedge & Sachs, has similar advice for UAE consumers. “Credit card debts are a never-ending loop. The impact of interest hikes will be felt in the coming two-three months if interest rates are raised monthly.”


Rachit said the intelligent thing to do would be to clear balances at the earliest. “Check with the banks for repayment flexibility and EMI options on outstanding payments,” he said. Following which, it would be good if individuals kept their expenses controlled.”


While paying the minimum balance would bring temporary relief, he said the long-term payment obligations would keep piling up. UAE consumers would be well-advised to keep a closer look at their income statements - and wherever possible reduce their overall debt.

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