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Dubai: Although it is imperative to have an emergency fund to help cover large unexpected expenses, such as medical bills or urgent family needs. But what if you don’t have an emergency fund? Or is your emergency fund balance too low? You may need to rely on credit cards.
“Using a credit card to deal with financial emergencies is not ideal, especially if you can’t pay back what you spent on the emergency when the bill is due,” said Rajesh Markara, Abu Dhabi-based credit coach and spending analyst, while stressing that How debt can balloon in the face of high interest rates.
But if you have no other choice, debt restructuring experts agree that there are ways to ease the pain when dealing with life’s emergencies with a credit card. Here are some such tips, and two UAE residents also share their solutions when faced with a similar predicament.
Using a credit card to handle financial emergencies isn’t ideal, especially if you can’t pay back what you spent on the emergency when your bill is due
– Rajesh Makara
• Use the credit card with the lowest interest rate
“If you must use a credit card for an emergency charge, use the card with the lowest interest rate. This is especially important when you’re charging a large charge and you know you won’t be able to pay it off all at once,” adds Markara.
The math here is simple, Markara explains: “The higher your credit card interest rate, the faster your outstanding balance will grow. So, in a major emergency, always use the card with the lowest rate.”
Abin Wilson, a UAE resident working as a financial analyst in Dubai, faced a similar debt crisis when his father died in India a few years ago. The unexpected happened when he had almost no savings and he was forced to add more debt to his credit cards.
“I couldn’t pay my emergency bills in a month, so I knew I needed to have a game plan and figure out how much money I could free up each month to reduce my credit card debt before it got any worse. Use those extra dirhams for it,” Wilson revealed.
Although it is imperative to have an emergency fund to help cover large unexpected expenses, such as medical bills or urgent family needs.
Possible solution: Develop a repayment plan
If your credit card debt further adds to your home loan, the debt woes will only get worse, as was the case with Wilson. Your goal is simple: Pay off your credit card debt as quickly as possible, advises Mirin Raul, a Dubai-based personal finance coach who guides people on money-related issues.
“Maybe you’re paying an extra Dh100 a month to cover your mortgage. If you have outstanding credit card debt, transfer Dh100 to your credit card bill. Mortgage debt rates are much lower than those associated with credit cards debt. You should always pay off your debt first with the highest interest; after all, it will cost you more.”
• Transfer balances to introductory credit cards with zero interest
If you already have a repayment plan in place and feel like you can realistically stick to it, you may be able to pay off your debt faster and save some money with a “balance transfer”.
What is a credit card balance transfer?
Credit card balance transfers are often used by consumers who wish to transfer their outstanding balance to a credit card with a significantly reduced promotional interest rate. This also comes with better perks, like a rewards program for getting cash back or points for everyday spending.
“If you have good credit, you can get a card that offers zero-interest transfers for up to 21 months. This gives you plenty of time to make emergency bills without paying interest,” adds Markara.
“However, keep in mind that you need a card from a different bank than the one you’re trying to transfer money from, and these cards often have very high interest rates, which means that if you don’t pay and get out of balance during the introductory period, you’ll be Get into high-interest debt and make your situation worse than before.”
Finally, there is usually a balance transfer fee, although some cards offer a Dh0 balance transfer fee.
When swiping your card in an emergency, don’t assume that paying the minimum required monthly payment will do the trick.
• Paying the minimum monthly payment forces you to owe more
“Using a credit card in a financial emergency isn’t necessarily a bad thing. However, not paying your credit card balance in full each month does cost you. If you’ve just been charged Dh10,000 or more for unexpected financial In a crisis, you’re more likely to not be able to pay off your balance,” adds Markara.
This is mainly due to the high interest rates on credit cards. As of September, the average global credit card interest rate was 16.7%. This means that if you don’t pay off your balance in full each month, your credit card debt can grow rapidly, especially if your balance is high.
Also don’t think paying the minimum required monthly payment will do the trick. Another UAE resident, Danilo Bautista, regrets making the mistake of swiping his credit card at his home in the Philippines for emergency family home repairs in 2015.
Using a credit card in a financial emergency isn’t necessarily a bad thing.However, not paying your credit card balance in full each month does cost you
– Rajesh Makara
“My credit balance just snowballed. After 17,000 dirhams in one swipe, I tried to pay a little more than the minimum due – but I kept procrastinating. Since my debt has increased for a year and a half, I regret it even more made this move,” Bautista added, adding that it took him six years to escape the spiral of seemingly small debt amounts, which he did by painstakingly securing lower-rate loans. a little.
Raul explained it this way: “Assuming you have AED 4,000 in credit card debt and an interest rate of 17%, if you only pay the minimum amount each month, it will take 144 months to pay it off. During this period, you will pay more than Dh3,000 interest.”
“Furthermore, only if you no longer add any funds to your card’s balance during this period. That’s why it’s so important to pay off your credit card debt (including those arising from financial emergencies) as quickly as possible,” Lauer added. road.
Build an emergency fund
It’s time to build an emergency fund that you can tap into to cover unexpected expenses. If you have an emergency fund in place, you won’t have to worry about having these charges on your credit card again in the future.
“Building an emergency fund isn’t complicated, it just requires discipline,” Lauer said.
“If you have to start small: put Dh100 a month into a savings account. If you can put more in, go for it. Your goal is to create a contingency that can cover your daily living expenses for 6 to 12 months Fund. This way, in the event of an emergency, you will be covered.
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