Are 0% instalment schemes a debt trap?

Also: Expert advice on how to make your credit card work for you

Always wanted to get your hands on that super-cool gadget, car or furniture but never got around to doing it because your bank balance didn’t allow a super-expensive splurge?

Several credit cards in the UAE are offering cash on instalments with zero per cent interest.

One is allowed to break down the total purchase amount into smaller payback brackets over a period of time – say 3, 6, 9, or 12 months.

But, is there a catch?

“There’s always a catch. There’s no such thing as a free meal,” warns Rickson D’Souza, Director, Wealth Management at Pinnacle Asset & Wealth Management.

While many unsuspecting customers swipe their credit cards interest-free, they aren’t aware that it could possibly lead them into a debt trap.

Firstly, these schemes tempt people to buy expensive items that they might not have wanted in the first place, or worse actually cannot afford.

“It’s very simple. When you go for a sale, you are tempted to buy a TV, one that you don’t really want, only because it’s heavily discounted.

"And, on top of that they will allow you a three-months interest-free period to pay this money back,” he explains.

Once you give into temptation, it’s down to the maths.

“But when you don’t finish paying over the timeframe you’ve chosen, then your repayment will be charged at 36 per cent interest per annum, payable at 3 per cent per month.

"And most customers default on their payment, and therein lies the catch.”

Credit card companies are also hoping that customers default on repayments.

“So, the TV that you got at 20 per cent discount is now going to cost you 36 per cent more over one year.

"And, if you don’t end up paying in one year, then it’s going to be a really expensive TV! And to think that you didn’t actually need a new one!”

Financial experts claim that credit card companies do give people a false hope, making them believe that they can swipe their cards for things they can’t actually afford on their income.

“The masses over here are in some form of a debt trap already,” he asserts.

The scheme, however, does benefit if the spender who is disciplined about repayment. “If you are methodical about your payments then it’s good to use the cards, but if you extend that period then you are paying huge interests.”

How to make a CC work for you

Despite being an expert in almost all matters related to money, Rickson stresses how credit card statements can be confusing.

“I’d be shocked if I could find one person who could explain the fine print. When you get a 3-page credit card statement, you read the first page and the last and you pay what you owe the bank.

“And most of the time you end up paying minimum balance, which means you will pay them that money for the rest of your life.”

The minimum balance, he explains, means little in terms of repayment. It might save you the late payment fee, but the interest rate is still ticking away.

The credit cards, most experts insist, must be swiped only if the spender can pay up the entire amount in one-go, or else the accumulated amount could spiral into a credit card debt.

“If you are going in for retail therapy, then remember that when you swipe your card, you are potentially paying 36 per cent more for it.

“So, your Dh10,000-worth watch, the one that you are hoping to pay up over a year, will cost you Dh13,600. And, this is assuming you’ve paid it in one year. If not, compound that, every single year. And that’s how big it gets,” Rickson explains.

While many of us are wary about using credit cards, the key is not to blank it out but to use it smartly.

“There are deals on credit cards. I make my entire monthly expenditure and investments on those cards, and at the end of the month, I write a cheque for the full amount and it’s over. And, in the bargain I’ve earned tonnes of skyward miles, which I encash for flight rewards,” adds Rickson.

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