Using credit cards feels simple until the bill arrives. Many people living in the UAE find their credit card balances growing faster than expected, even when they make regular payments.
Understanding how credit card interest works can save you thousands of dirhams each year. The math behind these charges might seem complex, but the basic concept is straightforward once you break it down.
How Monthly Interest Rates Work in the UAE?
Banks in the UAE display interest rates as monthly percentages rather than yearly ones. Monthly interest rates in the UAE range from 2% to 4%, though some promotional offers go as low as 1.5%.
This monthly rate sounds smaller than it actually is. When you calculate the yearly cost, a 2.5% monthly rate becomes 30% annually. A 3% monthly rate jumps to 36% per year. With a 2.5% monthly rate, carrying AED 1,000 for a month means around AED 25 in interest.
Understanding Daily Interest Calculations
This process is called daily compounding. The bank takes your monthly rate, divides it by 30, and applies that tiny percentage to your balance each day. Then tomorrow, they calculate interest on your new higher balance.
Interest on credit cards typically compounds daily, meaning the interest charged for day 1 is added into the calculation for day 2, the interest from day 2 is added into the calculation for day 3, and so on.
This creates a snowball effect. You end up paying interest on interest, not just on what you originally spent.
A Real Example: How AED 10,000 Grows
Let’s use actual numbers. Say you charge AED 10,000 on your card and can only make minimum payments.
Most UAE credit cards carry an interest rate of 2.83% per month, which equals 39.78% per year. If you borrow AED 20,000 at that rate over five years without making any repayments, you would owe almost AED 107,000.
Even making minimum payments doesn’t help much. If you make the minimum repayment on AED 20,000 (at AED 798 per month), it would still take 47 months to pay off the debt and you would pay AED 37,482 in total.
Why Minimum Payments Keep You Stuck?
Minimum payments seem helpful because they keep your account in good standing. But they’re designed to keep you in debt longer.
Most minimum payments cover just the interest charges plus a tiny portion of what you actually spent. This means your principal balance barely moves down each month.
The Grace Period
Every credit card offers a grace period, usually 51-56 days from your purchase date. During this time, you pay zero interest if you clear the full balance.
This grace period is the key to using credit cards without losing money to interest. Pay the full statement amount before the due date, and you never pay a single dirham in finance charges.
How Different Transactions Get Different Rates?
Your credit card might have several different interest rates for different uses. Purchase rates apply to shopping. Cash advance rates are almost always higher.
Cash advances often attract higher interest rates and start charging interest immediately with no grace period. Using your credit card at an ATM is one of the most expensive things you can do.
