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Plastic fantastic
There's no financial product that offers as much instant gratification as a credit card.
Once you have one you can get your hands on thousands of Dirhams in cash, book dream holidays online, or even buy a car.
And you don't even need any money in the bank.
There are literally hundreds of credit cards to choose from in the UAE and banks offer everything from mobile phones to free flights as enticements to new customers to sign up.
It is very easy for customers to get blinded by these dazzling offers - particularly as it is so easy to get hold of a credit card in the UAE - regardless of how many you already have.
But while banks may promise the world, the reality is that a credit card can become your worst enemy, not just your best friend.
Extortionate charges, interest rates and the dangers of getting into debt are all realities credit card users face - unless they pick the right card and know how to use it wisely.
In this definitive guide, we give you the low down on how to pick the right credit card, the terms and conditions to look out for and what you need to know before using your card.
To put the guide together we enlisted the help of a team of credit card experts: Financial advisors Ben Lester of GlobalEye Group and Craig Holding of Acuma Wealth Management; Kashif Sohail, retail banking group, cards marketing and business intelligence at Mashreq, Anil Chander, head of cards at RAKBANK and Murray Sims, head of personal banking at RAKBANK; Premal Patel, American Express marketing director for MENA; Zeeshan Saleem, Barclays' head of cards business in the UAE.
Late payment penalties
The UAE market average for late payment fees is around AED120 - and fees range from as low as AED90 to as high as AED195.
According to Sohail, banks with a higher number of interest free days for customers, tend to impose higher late payment penalties.
"We have noticed that banks that offer more interest free days tend to have a high late payment charge.This allows the banks some financial control. Banks often charge higher late payment penalty fees because of their intention to induce financial discipline in their customers." he claims.
Late payment penalties are an important form of revenue for banks - who rely on the fact that revolving customers will regularly miss the deadline for making minimum payments on their credit card balances so will be charged.
"As harsh as a late payment penalty may be for a customer, they are a big source of revenue for banks," said Sohail.
Customers should consider what kind of credit card user they are and whether they are likely to regularly miss payments when considering these charges.
"People don't pay much attention to late payment penalties when looking at credit cards," says Sohail.
"But inevitably customers will end up paying them - whether intentionally or unintentionally - particularly if they travel frequently so tend to miss payments," he goes on to say.
Some credit card issuers claim they are prepared to negotiate with customers regarding late payment penalties particularly if there is a genuine reason for a missed or late payment.
So customers are advised to try to find out a bank's attitude to late payments when applying for a new credit card.
Sims of RAKBANK which charges a AED125 late payment penalty, says: "Very often we reverse late payment fees if customers come to us and say they were in a situation where they genuinely couldn't pay on time.
"We are prepared to listen to customers' individual. Circumstances if they come to us and to work out a repayment schedule with them."
Annual fees
One of the biggest factors that influence a customer's decision over whether to select a credit card is the annual fee attached to it.
Annual fees in the UAE range from AED150 as charged by Abu Dhabi Commercial Bank, Arab Bank, Mashreq and MeBank on their Classic cards - to AED750 as charged by First Gulf Bank for their Platinum card.
There are however some banks that charge no annual fee at all - notably RAKBANK which has a range of three credit cards that are all free for life.
Fee free offers are very tempting to customers as they mean not having to hand over any cash upfront.
"Annual fees are one of the biggest considerations that people have when taking a new credit card," says Mashreq's Sohail. "When making the decision over whether to take a new credit card, customers' immediate concern is what fees they have to pay upfront."
However customers are advised not to get blinded by cards with no or very low fees - and to check that the bank is not compensating for this with high interest rates or late payment penalties.
Lloyds Bank for instance offers fee free credit cards - but charges interest rates of a relatively high 2.5% per transaction on cash withdrawals.
"If a bank is offering a card with no fee but a really high rate of interest, then you would be better off paying the upfront annual fee than a lower rate of interest each month when you use the card," says Lester.
Patel of AMEX, adds: "Lots of banks will charge no fee but they will load up interest and late payment penalties."
Chander of RAKBANK warns that many banks, such as HSBC Middle East will offer a card that is only free for the first year: "What a lot of banks in this market seem to be doing is offering a free card initially then charging an annual fee without warning after one year."
The extent to which customers are influenced by annual fees depends on what kind of credit card user they are. Those who only plan to use the card as back up in emergency situations would naturally rather not pay any fee. "These customers just want a card with no annual fee, no frills or extra benefits," says Sohail.
Interest rates
Interest rates on credit cards in the UAE are in the range of 1.5% to 3% per month and the amount of interest free credit offered is generally between 45 to 56 days.
Although there are fairly big discrepancies between the rates being offered by the different banks - experts say interest is not a factor many consumers take into consideration when picking a credit card.
One of the reasons for this, according to Sohail, is that the majority of consumers believe, when they take a credit card that they will be a transactor - somebody who pays their balance in full every month and is not charged interest. Therefore they will not be affected by high interest rates.
However, as Mashreq's own figures show - around 90% of the consumers that apply for a credit card subsequently go on to become revolvers - customers that do not pay off their credit cards in full at the end of every month.
"The UAE market average is that of every 100 credit cards you send out as a company only 80 of them are ever activated," says Sohail. "And of those 80 users 70 will revolve."
He goes on to point out that while on paper a 2% difference between interest rates can seem insignificant - the reality is that it can make a big impact.
"Let's say 2% is your monthly interest rate and you had a AED10,000 monthly balance. In a year you would have paid AED2,400 interest. Whereas if your interest rate is 2.4% you would have paid AED3000 in a year - that's a big difference."
An equally important factor is whether the bank offers an interest free period. Some banks allow generous amounts of interest free credit - MeBank for instance offers credit cards with 90 days of interest free credit. Whereas others offer none at all.
When considering interest rates customers should also think about what they are going to use the card for. Ben Lester of GlobalEye Group advises customers that because of the relatively high monthly interest on credit cards, loans can be a better way of paying for expensive items long term. "Interest rates tend to be lower on loans and there's a structured repayment schedule making them easier to pay off," he says.
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