Beware UAE credit card rates

Beware UAE credit card rates
01 July 2010

PEOPLE in the United Arab Emirates can boast about many things – like having the world’s highest tower, finest hotel or biggest shopping mall. Unfortunately, they can also lay claim to have some of the highest rates of interest on credit cards anywhere in the globe.

Compared with credit card rates in the United States and Europe, rates in the UAE are more than double, if not more. This painful reality hit my husband and me soon after we moved here three years ago.

As you might imagine, our first trip after we had settled into our new apartment was to the nearest bank. We had planned to meet a bank representative to discuss the different bank account and credit card options available. After all, most people in this day and age can’t live without having a credit card, right?

After a brief wait, a bank representative sat with us and started detailing the bank’s latest offer, a rate of 2.2%... per month. Say that again? My husband and I looked at each other, thinking we’ve misheard. The bank representative was quick to dispel any doubt we had in our minds: yes, per month.

My head started spinning as I tried to calculate the annual equivalent. Numbers have never been my forte, so my husband quickly came to the rescue and concluded that a rate of 2.2% per month was equivalent to a staggering 26.4% per year.

Rate shock

The rate was all the more shocking given that we still had two credit cards from the US, one charging an annual 9.95% on purchases and 4.95% for life on a balance we transferred a few years back. The second had an annual percentage rate of 13.49%. These rates are ridiculously low compared with their UAE counterparts.

So why would a US resident, for example, be charged an average annual rate of 12-16% in the United States, and then be charged 26.4% here? And why are credit card rates quoted per month, while all other rates – like those on personal loans, mortgages and car finance – are quoted per year? Shouldn’t there be standard metrics to compare your different debt options?

It seems that, with the absence of a credit bureau, credit card rates here don’t take into consideration the risk profile of the borrower, so, unlike the US, a person with a low credit risk profile doesn’t benefit from a lower rate of borrowing. Secondly, because of the large expatriate population in the UAE and the fear that expats could flee the country without paying their debts, banks factor in added risks.

Debt trap

High credit card rates could have disastrous consequences for your finances. Here’s an example to illustrate: say you have AED 30,000 ($8,167) debt on a credit card with 26.4% interest rate. If you only pay the assumed 5% minimum payment, it will take you 16 years and 11 months to pay off your debt. Moreover, your total payment will be about AED 53,500 ($14,565).

Even if you repaid 10% per month it will still take you six years and nine months to be back in the black and it will cost you a total AED 38,500 ($10,481).

Given the unlikely possibility that UAE credit card rates will come down in the near future, avoid carrying any debt on your credit cards, by all means necessary. If you happen to have credit card debt already, try your best to repay it as soon as possible. Failing to do so will put you in a debt trap that will not be easy to escape.

Compare credit cards with cashy.

Do you have a similar tale? Please share it with cashy by posting your comments below!

Comments

  • jen
    jen
    2010-07-11T11:38:21

    That is quite a rate shock, Lina! A few quick calculations show that someone with a balance of $1,000 and repaying Citi's minimum repayment requirement of 2.74% of the outstanding balance per month would take a whopping 26 years and two months to clear the debt! And they'd pay more than three times what they'd spent - $3,242 - in interest during that time. Do these types of figures disuade the cashy community from getting into debt?

  • sandimdrt
    sandimdrt
    2010-07-20T11:37:02

    NO, on the contrary! Having done innumerable fact finds as a financial  planner  for the last 12 years I can safely say that most of my prospects have more than 3 credit cards, pay the minumum balance on all and balk at the idea of only a 6-8 % return on a proposed savings and investment that I would recommend !!

  • keanan
    keanan
    2010-07-18T18:21:58

    I have called bank customer service centres to ask about fees and penalties incurred when I have (very rarely) missed my payment date and enquired about how they calculate their interest - and whether it's worth me paying off the balance before the next statement date - and am yet to be given a definitive, easy to follow answer. I would say that the people manning the customer service phones do not understand how credit cards work.

  • sandimdrt
    sandimdrt
    2010-07-20T11:30:56

    If you pay off your outstanding balance in full how are they going to earn more money from you?  So,  while you pace the floor or sweat it out, they will continue to drag their feet and you will still have an outstanding balance and they  will earn yet another month's interest yet from you

  • DubDub
    DubDub
    2010-09-19T22:06:53

    Why would they advise you to pay the balance. THey have a vested interest in you not paying it! At 26% per annum. OF COURSE, pay as much as you can, and cut the card up as soon as you can!

  • mutaz
    mutaz
    2010-09-19T18:31:02

    Wonderfull cashy! your community comments are published to facebook and twitter now :)

  • mutaz
    mutaz
    2010-09-19T18:41:12

    and twiiter

  • mutaz
    mutaz
    2010-09-19T18:50:37

    and... mmm.. twitter

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