Credit cards can be a powerful tool for managing your finances. Still, many Muslims shy away from them because of the fear of dealing with Riba.
I am of the camp that believes that as long as we are financially savvy with our spending, we can gain all of the benefits of having a credit card without worrying about Riba that's associated with late payments and overspending.
As a refresher, a credit card is a type of payment card that allows you to borrow money from a lender (mostly a bank) to make purchases. When you use a credit card, you essentially take out a short-term loan. This means that the money on your credit cards should never really feel like "free money". Instead, it is your money that you are getting access to at a more convenient time.
For those who are either first-generation Americans or whose parents/guardians cursed credit cards as though they are the devil's instrument (which we have yet to disprove), you might actually be one of the first in your families to build a credit history.
Therefore, I want to clarify some of the top benefits of using credit cards before I give you the cautionary tale:
1. Convenience
Credit cards are a convenient way to make purchases without carrying cash. You can use them to make purchases online, over the phone, or in person at millions of locations worldwide.
2. Rewards and bonuses
Many credit cards offer rewards programs that allow you to earn points, cashback, or miles for every dollar you spend. These rewards can be redeemed for various things like gift cards, travel, merchandise, or statement credits. Today, there are multiple credit cards that have about $200 and up sign-on bonuses for being a first-time user of their card. *This is subject to how much you spend in the initial months*
3. Protection
I don't know about you, but I don't like the idea of merchants, vendors, or online hackers having direct access to my bank accounts. Credit cards offer an added layer of protection against fraudulent charges and errors, which can save you a lot of money and hassle in case something goes wrong. Not to mention, you get refunded faster on credit cards than you do debit cards most of the time.
4. Building credit
Using a credit card responsibly and paying your bills on time is one of the easiest ways to build your credit. To my knowledge, it's very hard to live in the Western world without some form of credit history, whether that be getting an apartment, leasing a car, mortgage, some jobs might even look into it! Your credit score will thank you if you are able to use your credit card responsibly. (I will be breaking down the credit score in a future post, Insha'Allah)
5. Emergency Fund
Life happens. Allah has made it abundantly clear that we will be tested on this earth and our finances are not exempt from that testing. In addition to having a separate cash emergency fund, a credit card can also serve as an emergency fund in case of unexpected expenses or financial emergencies.
Alright, now on to the caveats.
When shopping for a credit card, always be sure to read the fine print and compare offers to find a card that best suits your needs. Sometimes it is easy to be coerced into getting a credit card you might not need.
Raise your virtual hand if you have received a number of credit card offers in the printed mail that made you feel good because they were "inviting" you to use their card. As though using their card was an invite to the finance Met Gala.
It doesn't just end at the paper mail! I am recalling the number of times I almost fell into the traps of the store credit cards every cashier wants to offer oh so conveniently. I once had to pull out the mantra "Not today Sephora!" to keep myself from getting one. But, I digress.
Below are some tips that I think will be helpful in how we as Muslims can utilize credit cards to reap the benefits listed above:
1. Be "The Transactor"
The transactor does not carry a balance from month to month because they always pay their credit card bills in full by the due date. On the opposite end is the revolver who carries a credit card balance from one month to the next and exposes themselves to late fees and interest.
2. Use a 0% APR introductory offer
For some, there is the blissful introductory 0% APR period for new cards, which just means there is no interest charge on your credit card balance for a period of time, typically anywhere between six to twenty-one months.
I caution that you don't let that intro period lull you to sleep to the point where your eyes only open when the balance you've carried for a year is hit with 24% interest. That, my friend, is what I call a nightmare.
3. Take advantage of balance transfers
If you have a high-interest credit card balance, consider transferring it to a card with a lower interest rate. Many credit cards offer balance transfer promotions with low or 0% interest rates.
4. Avoid cash advances like the plague
Cash advances are subject to higher interest rates and fees than regular purchases. Just don't do it.
5. Set up automatic payments
You can't forget to pay it if you've automated it. Setting up automatic payments ensures that you never miss a payment and, therefore, never incur late fees or interest charges. Riba will be dodged.
As Muslims, ensuring our financial well-being is a form of Amanah. It goes without saying, but none of this is possible without you taking the first steps to understand your spending habits and monitor how much money is coming in and going out of your pocket on a monthly or even yearly basis.
Ultimately, credit cards can be a powerful tool for managing your finances, but they must be used responsibly to avoid Riba. I truly do believe that you can enjoy the benefits of credit cards without compromising your religious beliefs.
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