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APR

APR is a term that you would come across frequently in the context of credit cards.  It is short for “Annual Percentage Rate” and is the interest rate that the bank charges on outstanding balances carried on the credit card.  It is important to note that although every credit card in the market has an assigned APR, you can use your credit card in a manner such that you do not incur any interest charges at all.

APR, as indicated by the use of the word “Annual” in the name, is an annual percentage rate of interest.  However, credit card companies levy this interest rate on a daily basis. To do this, they use the stated APR and divide it by 365 to arrive at the applicable interest rate per day.  This is used to calculate interest charges on the outstanding balance on the credit card.

While APR is the most commonly known interest rate with regard to credit cards there are also other rates such as the Cash Advance Rate (applicable to cash withdrawals made using the credit card) and the Balance transfer interest rate (applicable to outstanding balance amount brought forward from another bank’s credit card to this credit card).  These charges are different from the APR which is used for all other (retail purchases) charges on the credit card.

Total Credit Limit

Every credit card is assigned a “Credit Limit” by the bank.  This is also sometime known as a “Credit Line”. This is the maximum amount up to which the customer can use his or her credit card.  Credit limits are assigned based on many factors which include the customer’s income, other liabilities, disposable income, employer, type of credit card applied for and so on.  Credit limits are assigned at the time of issuing a new credit card but can also be changed multiple times over the lifetime of the credit cards. These changes can be initiated by either the bank directly or by the bank based on a request the customer.  Banks usually initiate an increase in credit limit over a period of time based on a review of the customer’s usage and repayment history on the card. This change could be either an upward revision i.e. an increase in the credit limit based on good usage and repayment history displayed by the customer.  Or it could be a downward revision, i.e. a decrease from the previous credit limit assigned based on unsatisfactory performance on the credit card which is most likely due to delayed repayments on the card. Customers can also request for increases or even decreases in their credit limit. Increases in credit limit will of course require the bank’s review and approval as it is effectively an increase in the “line of credit” being offered by the bank.  Decreases in credit limit, however, can be done simply based on the customer’s request as there is no additional credit line being granted.

Current Outstanding Balance

This refers to the amount that is outstanding or in other words yet to be repaid to the bank.  This could comprise of purchases that the customer has made on the card as well as charges such as interest charges and any other charges that have been levied by the bank.  Such charges could include annual fees, late payment charges, over limit charges and so on.

Available Credit Limit

Available credit limit refers to the amount available to the customer to utilize on his or her credit card after taking into consideration previous purchases already made on the card and any other charges such as interest, fees etc. that are yet to be repaid.  It is basically calculated as the difference between the Total Credit Limit and the Current Outstanding Balance:

Available Credit Limit = Total Credit Limit – Current Outstanding Balance

Credit Card Billing Statement

A credit card statement is a summary of all transactions that have occurred over the specific billing period.  Credit card statements are issued for each “billing period” which is a specific amount of time, usually around 30 days.  The credit card statement shows key details of all transactions that had occurred on the card. These include the date of purchase, name of the establishment where the purchase was made and the value of the purchase.  A credit card statement also includes details of other items that are billed to the customer by the bank such as interest charges and fees (annual fees, late fees etc.) and details of all credits including payments made by the customer, any purchase reversals and so on.  Credit card statements also provide important information such as the payment due date and a summary of the rewards program associated with the specific credit card. For example, an Air Miles credit card statement would provide details of the Air Miles earned by the customer during the particular billing period and also the overall Air Miles that he or she has accumulated overall.  While the details mentioned above are common to almost all credit card statements, banks also utilize the credit card statements to communicate other aspects to customers such as special offers, various payment options, branch locations and so on. Banks also encourage customers to opt for e-statements i.e. statements sent over email as opposed to physical statements that are mailed to customers.  E-statements are obviously a much more efficient and environment friendly alternative compared to paper statements and these days many banks actively discourage paper statements by charging customers who opt for physical credit card statements.

Payment Due Date

The Payment Due Date is the date provided by the bank by which the bank must receive at least the minimum payment amount due by the customer.  This date is mentioned on the credit card billing statement and is an important date to remember to avoid incurring any late payment charges. Many banks allow for a day or two of “grace” days before levying late payment fees on the card if payment is not yet received.  It is especially very important to make the payment before the payment due date if you want to avoid incurring any interest charges. This is in a scenario where a customer makes the total payment due as mentioned on his credit card statement. Banks do not charge interest if the total payment due is made on or before the payment due date.  Interest is charged on a credit card on an “Average Daily Balance” method and if the total payment is not received on or before the payment due date then all purchases on the credit card will incur interest charges from the day that they were made until they are cleared by a payment.

If you have a savings or current account with the same bank that issued you the credit card you can setup an automatic payment debit to make sure that payment on the credit card is made directly (and automatically) by debiting your savings account.  This payment instruction can be setup for the minimum amount, any pre-specified amount each month or for the total statement amount. This is a very useful tool that customers can utilize to ensure they do not miss making payments before the payment due date and thereby saving them considerable amounts in late fee charges and interest charges.

Most banks these days provide customers with online banking and mobile banking facilities and customers will do well to utilize these services to make their lives simpler and also help save them money.  If your savings account and credit card account are with two different banks then you could still set up a monthly auto-debit instruction with your savings bank account to transfer a specified amount of money each month to your credit card issued by the other bank.  The main shortcoming of such an arrangement is that specific details of the credit card statement such as the minimum amount due or the total amount due will not be known to your savings bank and hence only a fixed payment can be made automatically each month. However, in such scenarios customers can still utilize the online banking services to make payments on their credit cards with other banks thereby saving them time from having to travel to branches, ATMs or other payment locations.

While there are no general fixed definitions of types of credit cards available, based on the kind of key feature or the reward they offer credit cards available in the UAE can be broadly classified into some categories.  It is useful to have a basic understanding of these types to determine which card is most suitable for your specific needs.

Cashback credit cards

Cash back credit cards are credit cards that offer the user a benefit of earning back a percentage of his or her spend on the card through a direct cash back credit.  For example, if a card offers you cashback of 5% on all supermarket spends and you use this card in a supermarket for AED 1,000 in a particular month, the bank will give you a credit of AED 50 (5% of AED 1,000) in your next credit card statement.  This means that you have effectively saved AED 50 and your supermarket spend only actually cost you AED 950. Cash back credit cards can be very useful in helping you maximize your savings by simply using your credit card.

Rewards credit cards

These are credit cards that offer their users a benefit in the form of rewards points (or Air Miles) against purchases made by them on the card.  The type of rewards offered can vary from points that can be redeemed against mall shopping vouchers, dining discount vouchers, air miles and so on.  The value of rewards earned and the process of earning as well redeeming the reward points can vary significantly not just from bank to bank but also within different credit cards offered by the same bank.  This can make it very challenging for the lay person to understand which offers the best rewards program that is most suitable to him or her. Using a credit card comparison website such as Soulwallet will help narrow down the choices for you.  

Balance Transfer credit cards

Many banks in the UAE allow customers to transfer a balance outstanding from another bank’s credit card to a credit card of their own.  The benefit they offer to customers for doing this is a lower interest rate on the balance transferred, typically for a specific period of time.  For instance, if you have an outstanding amount of AED 10,000 due on your credit card and are unable to pay this up in full you could consider moving this balance to a balance transfer credit card of another company which offers you a lower interest rate.  Doing this will help you potentially save a lot of money depending on a few factors. These include the rate of interest in your existing credit card versus the rate of interest offered on the balance transfer credit card; the period of time with the lower interest rate offered on the balance transfer credit card; and the time horizon by which you believe you will be able to pay off the total amount outstanding.

Balance transfer credit cards can be very useful in helping you reduce your overall credit cards interest debt.  Many banks even offer 0% interest for a short period of time which can save you several hundred dirhams based on the total amount you have outstanding on your credit card.

Islamic credit cards

Islamic credit cards were introduced because ribaa (the Arabic word for interest) is forbidden in Islam.  These cards work a bit differently from conventional credit cards. One format offered by several banks is that of a “profit rate”.  Here, instead of the customer paying interest charges, he or she is effectively paying an additional amount or “profit” to the bank for every purchase made on the credit card.  It is very similar to the concept on an interest rate but the ideology is that the user is incurring a “profit” fee for services enjoyed by using the credit card.

Another format of an Islamic credit card offered by some banks in the UAE is a monthly fee-based credit card.  Here, instead of paying interest charges for each purchase the user only pays a fixed amount or a fixed fee each month for using the credit card.  This fee is payable irrespective of the amount used on the credit card.

Business credit cards

Business credit cards are issued to small and medium sized businesses to offer them the access to more working capital to fund their operations by providing short term credit for various official expenditures.  These are different from corporate credit cards which are offered to large established corporates based on the company’s credit profile. In contrast, business credit cards are issued to the owner or proprietor of a small or medium sized business based on his personal credit profile.  

These cards are useful to help the owner gain more access to working capital, make payments to suppliers through the card rather than a personal check, give access to employees to the credit limit by issuing them separate supplementary credit cards, to earn reward points on regular expenditure of the business, enable the owner to separate his or her personal and business transactions, keep a record of official expenditure made on the credit card through the credit card statements and so on.  

While the credit card is issued to the owner for use in his business, the owner is liable for all charge incurred on it irrespective of the performance of the business.  Hence, while enjoying the many benefits of the credit card, the owner also needs to ensure he manages it as he would his own personal credit card to protect from any fraud and other liabilities.

Travel credit cards

Given its location and large expatriate population, the UAE is a hub for international travel not just regionally but globally as well.  A significant proportion of residents travel internationally very frequently either for business purposes or for tourism and banks in the country have seized on this opportunity to offer residents credit cards featuring various benefits related to international travel.  

Travel credit cards offer users travel related rewards and benefits such as air miles that can be redeemed against flight tickets, reward points that can be redeemed against hotel room bookings and so on.  In addition to the rewards that these cards offer, they also offer customers various other travel related benefits such as free travel insurance, free visa processing fees, emergency cash replacement, emergency medical insurance and so on.  Some banks have even got into arrangements with large travel related companies to offer customers benefits such as discounts on every booking made using the particular travel company and so on.

As with all the other types of credit cards, travel credit cards also vary significantly in their rewards offerings and value proposition for customers.  Understanding the benefits offered by each travel card and identifying which card is most suitable to your specific travel spends and needs will help you maximize the benefits that can be enjoyed by using these cards.

Premium credit cards

Premium credit cards offer customers not only certain key benefits in the form of specific attractive rewards such as Ari Miles, Points and so on but also many ancillary benefits such as complimentary premium lounge access at various international airports, complimentary access to golf courses, free offers on cinema tickets, complimentary offers on valet parking, special features such as purchase protection and extended warranties for purchases made on the card.  Premium credit cards almost always carry reasonably high annual fee charges but at the same time can also offer significant value to customers if their features are utilized effectively. Many banks also impose minimum monthly salary eligibility criterion for such credit cards to add to their sense of “exclusivity” in the credit card marketplace.

Standard or Plain Vanilla credit cards

Almost all banks offer customer Standard credit cards which do not carry any annual charges but also offer only very minimal benefits in terms of rewards and other features.  Standard credit cards are usually offered with relatively low credit limits. While they do offer users the advantages of a credit card as opposed to using cash, they do not offer very much else.  However, for customers in lower income brackets or for customers who want a credit card with a very low credit limit for any particular reason these cards can prove to be a useful alternative.

Supplementary credit cards are credit cards issued by the bank to you based on your request for them.  Supplementary cards are linked to the primary credit card and access the same credit limit available to the primary credit card.  Supplementary credit cards are issued so your family members can also enjoy the benefits of using a credit card. In most instances, supplementary credit cards are only issued to immediate family members.  In the UAE, some banks offer supplementary credit cards to children as young as 13 years of age. An exception to only family members being offered credit cards are Business credit cards offered by certain banks where supplementary credit cards are issued to employees of the company owned by the primary credit card holder.

While supplementary credit cards access the same credit limit as the primary credit card, their credit limit can be set lower than the primary credit card as per the instructions of the primary credit card holder.  This is a useful feature for the primary credit card holder to have more control on their overall credit limit. Giving your 13 year old access to your full credit limit might not prove to be a very wise financial decision! Having said that, however, introducing your children to a credit card at an early age can be an opportunity to help them understand how credit cards work and prepare them better for when they have access to credit themselves as young adults.

Most banks also do not levy any charges on supplementary credit cards.  This is at least the case for the first 3-5 credit cards issued. Any supplementary credit cards issued beyond that may incur marginal annual fee charges.  If this is an important criterion of consideration please do keep it in mind when assessing options of which credit card to apply for.