The issue of debt management can be regarded as one of the most sensitive and important in the context of the UAE, which is characterised by the further velocity of the financial and credit market. As evidenced by the access to credit facilities as well as loans, there are different traps into which many people fall and which put them into financial difficulties. Here are five tips to guide you on how to evade pitfalls that arise in managing debts and how to be on the safe side.
High-Interest debt
The most obvious mistake that one is likely to make is to borrow at a high-interest rate. Credit cards are good but normally attached to high interest rates thus not advisable when balances are carried to the next month.
How to avoid:
Ideally, it is best to make the minimum payment on the end of every billing cycle to erase your credit card balance. Be sure to avoid or minimize the use of these offers and if you have to, ensure to transfer them to a card with a lesser rate or even take a personal loan at a better rate. Finally, credit cards should only be used for necessary expenses only that is avoid its use in unnecessary expenditures.
Neglecting to budget
Another big mistake is the inability to adhere to a budget. Your income, expense and debt are always a very important data to consider but if they are not well understood one can easily find himself in a situation of spending so much that he barely provides for all debts which are due and payable.
How to avoid:
Write down a detailed monthly spending plan that would reflect all the likely and possible incomings and outgoings, including instalments on debts. When the money comes, set a percentage of that income for the purpose of repaying the borrowed amount, and be disciplined to this practice.
Overleveraging through multiple loans
This is another mistake, known as having multiple loans or credit facilities, and this is most often a result of being able to easily borrow in the UAE. It means that one has to pay a considerable amount of money back every month thus many other necessary expenses remain unrealized.
How to avoid:
To avoid taking a new loan when you cannot repay it equally come to check on your current progress and the debts you currently have. The most common one is the use of the quite strict Debt Burden Ratio guideline used in the UAE, for example, where your monthly repayments should not exceed 50% of your monthly income. It is always advisable to do a second estimate before accepting to make more expenditure through borrowing.
Ignoring debt repayment prioritisation
The other common mistake is failure to give adequate attention to the priority to be given to debts. Some may pay off small debts so as to settle with fewer creditors, while others may postpone the payment of debts which attract high interest rates.
How to avoid:
This process must be approached understandably and systematically; however, it is possible and reasonable to select a strategic approach to the interest part of the debt. Another strategy the avalanche method that involves paying the highest interest rates credit card balances first is most efficient in conserving your money. The other method is the snowball method in which the individual pays the debts in ascending order of the amount so as to gain psychological satisfaction when the number of debts is reduced.
Failing to plan for financial emergencies
A large number of the citizens in the UAE do not prepare for emergencies, meaning that they will borrow money in case of an emergency. In the absence of working money, any small economic hurdle may lead to debts.
How to avoid:
Set up an emergency fund that should cater for at least between three to six months of living expenses. It can thereby serve as a shield to ensure that when additional expenses occur, you do not have to borrow from expensive lenders such as from a credit card company.
