Regulate unsolicited credit cards

Sunday, May 22, 2016

Dubai: Residents are calling for stricter regulations on banks to stem unsolicited credit card issuance and credit limit increases that could land unsuspecting people in trouble or further into debt.

Abu Dhabi resident Karen Ramos, 32, a nurse, went to open a salary account with one of the top banks in the UAE. To her surprise, the bank agent said she would receive a complimentary credit card and a cheque book.

“I told the agent I didn’t need any of it. But he insisted that I keep the card and not activate it. I thought that if I did not accept the offer, my application would be affected,” the Filipino expatriate told Gulf News.

“It seemed as if they automatically give credit cards to their clients even if they do not apply for it. I don’t remember signing any application for a credit card,” Ramos said. “I can lock it in a drawer but it’s a form of temptation, knowing I can activate it any time, anyway.”

Ramos said another bank did the same to her husband when he opened a salary account just last year. He received a credit card without requesting for one. And though they intended not to activate it, he ended up using it later on and added strain on their family’s finances. An Indian resident based in Dubai, Anjana (name changed upon request), was fuming when she received a letter from a bank on May 8 informing her that they had increased the credit limit on her three cards — one main card, an internet card, and a supplementary card. Anjana had pre-set the card limits based on her needs but the bank increased this around three years ago.

Now, the bank decided to club the limits together to form a combined credit limit of Dh36,100 from a previous set limit of Dh30,000.

“If one of my cards gets lost, anybody can just swipe that money in two or three transactions before I can do anything about it,” Anjana, a mother of two, said. “Sometimes, I give my internet card [with a Dh3,000 pre-set limit] to my sons when they need to buy something online. I don’t want that card to have more than a Dh30,000 limit.”

When she complained to the bank and requested the bank overturn their decision, she was told on the phone that it was a “management decision” that cannot be undone.

“I asked how the bank could take a unilateral decision on my account and to leave that decision to me. But they did not listen. They said they would issue another card with a lower limit instead,” she added.

Increased credit limits may push vulnerable people further into debt because if one can borrow more, he or she probably will. Some residents badly in need of cash commonly use their credit cards to withdraw money on the card as an easy alternative to taking out bank loans that require pre-approvals. This is at the risk of incurring higher interest on credit cards that are charged monthly compared to loans.

One Filipina resident, for example, had to flee Dubai in February after incurring debt amounting to almost Dh200,000. She would often withdraw money from her credit card and max it out when her other credit card payments — eight in all — were due. The cycle continued for years until she could no longer pay off her liabilities.

In a Credit Card Market Study by the UK-based Financial Conduct Authority published in November, researchers noted a “persistent high utilisation” of credit limits. Some 6.6 per cent (2.1 million people) of active consumers maintained a credit limit utilisation of an average 90 per cent or more over the year while incurring interest across all credit risk groups and demographic segments.

In the US, available credit also influences consumers’ debt in both the short and the long term, according to a working paper published in October by the Federal Reserve Bank of Boston. The study showed that for profitable customers whom banks call revolvers (those who continue to carry a balance from month to month), if their credit limit is increased by 10 per cent, the customers increase their credit card spending by 1.3 per cent within one quarter. Over the long term, their debt increases by 9.99 per cent.

Currently, there are 5.9 million debit and credit cards in circulation in the UAE. Average consumer debt in the UAE stands at $95,000 (Dh348,650) per household or $114 billion in total, a study by Strategic Analysis released in March said.

Attorney Barney Almazar, a licensed UAE legal consultant and partner at Gulf Law who helps Filipinos with debt cases, said in most application forms or contracts, cardholders have knowingly or unknowingly authorised the bank to decrease or increase their limits. He said currently the “automatic” increase is viewed as beneficial to the borrower.

“It [automatic increase] is akin to an incentive for being a “good” payer. However, it really depends on the financial maturity of the borrower. Access to credit is good, but the burden falls on a borrower who does not use debt correctly,” Almazar told Gulf News.

“But if the cardholder does not want the increase, he should inform the bank and it must comply.”

Banks or finance companies are not allowed to alter or vary terms and conditions for granting loan or a bank facility during its tenor, unless the borrower agrees in writing, according to Article 15 of the Regulation No 29 issued in 2011 by the UAE Central Bank.

Some banks do offer an option to decline credit limit increases via SMS, others do so via phone banking. In Anjana’s case, Almazar said she can file a complaint with the Central Bank if her bank continues to deny her request.

“At the end of the day, whether the increase or top up was initiated by the cardholder or the bank, the ceilings set by the Central Bank rules should be observed: limit should not exceed 20 times the borrower’s monthly salary and total monthly payments must not exceed 50 per cent of the borrower’s monthly salary,” Almazar said.

WHAT TO DO IF THIS HAPPENS TO YOU:

1) If you received an unsolicited credit card:

If you do not need the card, you can keep the card with you for your own security. But make sure to call the bank to cancel or close the card. Inactive cards kept in the drawer are not always harmless. This is a lesson an Abu Dhabi-based Indian expatriate learnt the hard way in an August 2015 Gulf News report. The banker received a “free-for-life” card, kept it sealed and unused in his drawer, but ended up in jail a year later after racking up Dh4,509 for membership and late payment fees. Always read the fine print, don’t readily believe agents’ verbal promises.

Also, keeping a card even if it is not activated can affect your debt burden ratio (DBR), which the UAE Central Bank pegs at not more than 50 per cent of one’s monthly income. Even inactive cards appear on your credit report.

2) Once your card is closed, request a cancellation or clearance letter from the bank.

Cancelling or closing a card is not enough. You need to secure a letter from the bank for your own protection should an issue arise in the future. Keep a record of all your clearances. According to Article 9 of the Regulation No. 29 issued in 2011 by the UAE Central Bank, in all cases, accounts must be closed when the business relationship between the bank and client is terminated. Hence, an appropriate certificate (clearance) must be issued within a maximum of seven days from the date of submission of the application.

3) If your credit limit is increased without your approval, call the bank right away.

Some banks offer an option for their clients to refuse credit limit increases via SMS, some via phone banking. If the bank says you had earlier signed a contract allowing the bank to increase/decrease your limit, it’s fine. But if the decision to increase your limit is baseless and the bank refuses to honour your request, you may file a complaint with the Central Bank.

By Janice Ponce de Leon Staff Reporter