I am back again to talk about credit cards and to introduce us to the concept of credit scores!
In my first blog about credit cards, I discussed the benefits of using credit cards and stated that as Muslims, we can use them without compromising on our beliefs as long as they are used responsibly.
It was after the post that I came across the almost contentious nature of how different people in our community view credit cards as a financial instrument.
On one hand, some people like me view the credit card as a utilitarian necessary evil because of the Western society we live in. On the other hand, there are people who believe that the credit card should be avoided by any means necessary.
As I mentioned in my mission statement, I want to keep an open mind to new information as we embark on this Islamic finance journey. Therefore, I have done some more due diligence by researching and reaching out to people I trust for their opinions,
For this post, I will highlight the points raised by both points of view and then leave it to you to decide for yourself what you think makes the most sense for your financial well-being.
POV 1: The Utilitarian Necessary Evil
As promised, I will be discussing the credit score first because that is really where the heart of this conversation lies.
Believe it or not, credit scores were a way to counter discrimination that would happen back in the mid-1800s within the credit system. The Mercantile Agency, one of the first credit reporting agencies, collected information about borrowers and lenders all over the United States. The agency initially conducted its credit scoring by having “impressions of borrowers”. We know that this really meant they gave their personal opinions about who they thought could pay the money back. Per history, this then leads to discrimination against minority communities. (3)
Fast forward to today and there are actual metrics that help measure the credit score. The score is supposed to be more objective than looking at someone and deeming them credit-worthy (or so we are made to believe).
A credit score is a three-digit number that represents your “creditworthiness”. Your creditworthiness as an individual is basically how likely you are to fulfill your financial obligations and repay the money you borrow on time and in full. The credit score number ranges from 300 to 850. So yes, it is very much like getting a score for your SAT or ACT test.
Below is an image that gives you an idea of what the ranges are from a poor credit score to an excellent credit score.
The credit score is actually made up of more than just your credit card usage. If you’ve ever taken out a loan (for some of us that might have been a conventional student loan) that also factors into your credit score. Your debt-to-income ratio also factors into the score, which is just a fancy way of saying the amount of money you owe compared to how much you actually have or make from employment.
In a quick summary, here are other key metrics that contribute to the credit score:
Payment History: Your track record of making timely payments on credit accounts.
Credit Utilization: The proportion of available credit you use.
Length of Credit History: The length of time you've had credit accounts.
Credit Mix: The types of credit accounts you have (e.g., credit cards, loans, mortgages).
New Credit Applications: The frequency of recent credit applications.
The higher your score based on these metrics the more they trust you with their money.
Who is this “they” I speak of?
Well, that’s the thing, it could be a multitude of institutions who look into your credit history like lenders, financial institutions, and even mortgages (Islamic and non-Islamic).
In New York City, landlords do check your credit score when you apply for an apartment! (1) They typically want a score of 675 or higher, which puts us right in the yellow zone of “Good’ credit or better based on the image above.
Some workplaces even check your credit report as part of their background checks. Instead of having access to your three-digit credit score because that is considered more “confidential”, workplaces have access to the written statement that outlines in detail your credit activity. So if you borrowed money, like the conventional student loan example, or have any other credit accounts then this is information the potential employer can look into (2)
Ultimately, a credit report does the same thing as a credit score and informs whoever reads it about your financial reliability just with all of the details that make up the score.
I don’t know how having access to the whole credit report is a better or less invasive alternative than knowing your credit score number, but I don’t make the rules.
If the most recent controversies about the debt ceilings for government spending are telling you anything, it’s that debt = our economy and how it functions. Whether we want that to be the case or not is a different conversation. It is no surprise then that taking on debt is how they measure our ability to pay off debt.
Sounds obvious, but alas, I have to make it as clear as possible because this next point brings us to our debacle for today.
Credit cards.
Of the ways to build a credit score, the credit card takes the top of the list in most searches I’ve conducted. Paying your bills on time comes in a close second and I will talk more about that in the second section of this post.
For the most part though, credit cards take the cake for the easiest way to either build or destroy your credit score depending on if you can pay it off on time and hopefully avoid paying interest.
Of course, you could take out a conventional loan, but we know this is a much easier thing to discount because of the obvious Riba (interest) involved in taking one out.
Alright, so I mention all of this why?
I think the resolution for this POV is a matter of intention.
قُلْ كُلٌّۭ يَعْمَلُ عَلَىٰ شَاكِلَتِهِۦ فَرَبُّكُمْ أَعْلَمُ بِمَنْ هُوَ أَهْدَىٰ سَبِيلًۭا ٨٤
Say “o Prophet, Everyone acts in their own way. But your Lord knows best whose way is rightly guided. (17:84)
Basically, your actions in Islam are underlined by your intentions.
Your intentions when getting a credit card can be, “Allah, I need to build credit to carry out my life in the West. I am using my credit card as a tool and will only place the amounts on it I know I can afford so I can pay off my balance in full and not pay Riba.”
This alone could potentially suffice for some as a way to reconcile their use of a credit card as a Muslim.
Now is the time I invert the story and speak to those who may not see it this way.
POV 2: Avoid By Any Means Necessary
For some, the very agreement associated with getting a credit card is full-stop haram.
Why?
Well, as you click on the “agreement” checkbox when you apply for a credit card, you are agreeing to all terms and conditions of using the credit card. You know, the long pages no one actually takes the time to read through… yeah those.
This means, on the off chance that you don’t pay the card back on time because of unforeseen future circumstances, you are agreeing to pay Riba.
Agreeing to pay Riba, even if you never intend to pay it because you plan to be responsible, is what this POV believes makes using the credit card haram from the onset.
Riba is a huge issue for us in Islam, so much so the one who deals in it is like one who wages war on Allah and our Prophet Muhammed SAW. (For a refresher on Riba, check out the blog post I made on it earlier.)
I do want to poke at this argument a bit though because in any case, it can be extended to how we agree to pay for most things contractually in the West. For example, your rental payments. If you miss the due date, they will charge you interest on top of the amount you owe for every month you don’t pay them. That is something that is also baked into the contract we sign when we get an apartment.
This same idea applies to mobile and utility contracts as well. If we want to play things fair, then the argument can then be applied to all forms of contractual agreements we have in the West that charge you interest if you are not able to fulfill a payment or a debt obligation on time.
To this, I say remember that taking on debt isn’t haram. It is charging and paying interest that constitutes Riba.
I don't think that the people in this POV would put the blanket statement of haram on every contract signed that plays into the basic needs of our daily lives. The argument can even be made that credit cards aren't a necessity. Especially if you will not be able to manage your funds well and that then makes it easy to outrightly pay Riba.
So food for thought.
Alas, I will not leave this POV hanging because there are still ways around the credit card as a way to build your credit score.
Let's make purchasing a home an example since it is the one that most people think of when they are considering building a good credit score.
I have found that Islamic mortgages can and most likely will look at credit scores. As a result of better credit scores, you are entitled to better rates.
When it comes to homeownership, the two main methods to build a credit score that completely avoid involvement in loans or credit cards are listed below:
Go through manual underwriting, which is a way of getting proof of on-time payments from your landlord, utility companies, or insurance companies instead of having them look for a credit score (3) These reports can be sent to any of the three credit rating agencies: Equifax, Experian, and/or TransUnion
Make a large down payment if you are considering purchasing a home in the United States or anywhere for that matter.
I am going to take a not-so-wild shot and say that this manual underwriting process can then translate to when you are looking for rental properties since the history of payments is being accounted for in the credit score.
I can't end this article without mentioning that with the rise of Islamic financial products, there are starting to be ways around getting conventional student loans too! One organization that I know of is called "A Continuous Charity" I hope that with time, more organizations like this one will grow and support our Muslim community in the pursuit of higher education. (Post about more student loan alternatives coming soon!)
Regardless of the POV you take on the permissibility of the usage of credit cards, there is no way around the credit score.
It is like the ominous “permanent record” our school teachers would warn us about. We all have come to realize that this permanent record doesn’t actually exist.
Yet, here we are with the credit score report. That, my friend, does exist.
How you decide to build it is truly up to you and what you believe is best for you. I can only present the information in the best way that I can, with full acknowledgment of my bias of course.
Still, I have tried my best to explain the different POVs and hopefully, it clarifies things a bit.
If not, then feel free to reach out to me at askmyfinancesis@gmail.com to ask any follow-up questions, and subscribe to the email list for more content like this!
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