The next crisis: Credit Card Debt

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Together with the financial crisis, the banking crisis, the mortgage crisis and the employment crisis, we are on the verge of experiencing a credit card crisis.

Recently UAE Central Bank Governor HE Sultan Nasser Al Suwaidi stated that real estate loans at the UAE banks stood at AED173 billion at the end of last year.

The total outstanding credit card debt is not yet estimated, but it is easy to predict that the number will only climb higher as more and more people reach for the plastic to make ends meet. Many of them are risky borrowers with generously extended credit limits, once upon the time, and no guarantees against  jobs losses.

Credit card defaults are on the rise and are expected to hit higher percent this year. This will obviously have greater impact on the lives of people who find themselves sinking deeper and deeper into debt.

It is a particularly vicious circle: every day, residents faced with layoffs and tough economic times, are forced to use their credit cards to pay for essentials like food and medical care – the costs of which continue to escalate. But as their debt rises, they find it harder to keep up with their payments. When they don’t, banks, trying to offset losses in other areas, then turn around and hike interest rates and impose new fees and penalties -  all of which makes it even less likely consumers will be able to pay off their mounting debts.

As more and more people default on their credit card debt, banks will find themselves faced with a sickening instant replay of the toxic securities meltdown from the mortgage crisis.

As the borrowers continue to default, banks will take a serious hit. Buy how are the banks trying to offset the rise in bad debts? By raising rates on the rest of their customers — making it likely that more of them will end up defaulting, causing even more losses for the banks. And round and round and round we go.

For years, banks have been rounding their balance sheets with an ever-widening array of fees: late fees, cash-advance fees, over-the-limit fees.

And credit card rates are escalating. Earlier this month, ADCB raised the late payment fee from AED 125 to AED 150. The bank also recently revised the limit on credit cards loans from 80% to 70%. And guess what: to cancel the credit card takes 45 days, say the customer service representative, adding that to have a credit card is a good thing.

For further information, here are articles and resources that can help. Get tips and techniques to pay off your balances and discover ways to regain your financial freedom through debt reduction.

By Gergana Mineva at Editor@DubaiChronicle.com

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