Why you must be an educated consumer

Chances are that like most people in the UAE, you have more than one credit card and have been using it to get to many things you 'want' rather than 'need'. But in today's environment we need to start to be more responsible and more aware of our debt. Banks are prudent in their lending strategies therefore making it more difficult for you to get a loan to buy a house or car if you already have too much debt. This is to ensure you do not end up in a debt trap.

Firstly, it is key that you understand that when you are using a card you are actually taking out a loan from your issuing bank. The bank charges interest on this loan. But, by educating yourself, you can use this loan without it costing you.

Most banks typically have a 20 to 30 days "interest free" period before they levy the interest on your purchases. This is your opportunity to defer payment on your card without incurring any interest. But many users do not pay their credit card balance in full each month, turning their card into a revolving credit line. While this is acceptable for short-term financing needs, over the long term, you can face accumulated finance charges and get deeper into debt.

It is vital you keep track of your balance and make payments on time. Setting up standing instructions with your bank for the minimum sum or the amount you want to pay avoids penalty fees and keeps track of the payment due date. However, it is important to note that as the balance on your card rises your minimum monthly payment also goes up.

You should also be aware that making only the minimum payment each month increases the time it will take to pay off your debt and increases the interest you end up paying. To pay your debts off quicker and cheaper, you should pay as much of your balance as you can each month. It is also good practice to settle your outstandings every once in a while. Another good way of managing your credit card debt is to stay within affordable levels of your credit limit. You should exercise prudence in using the available limits on your card. This will help keep your balance low and thus be easier to manage. You should evaluate the interest rate on your card periodically.

Using your credit card to get a cash advance is something you should avoid if you want to keep your expenses down. There is usually a high charge for this withdrawal and interest on this amount is more than what you would normally pay on a loan or overdraft. When facing credit card debt that can't readily be paid, the best plan is to act early. Speak to your bank, reach some sort of payment arrangement and make a resolution to stick to a repayment plan. The worst thing you can do is simply forego your card payment. Large banks have specialised departments to help customers in these circumstances and they will offer a wide range of solutions aimed at finding a resolution that best suits your budget and affordability.

Thimal Perera is Head of Cards, HSBC Middle East