Muslim’s Guide to Debt and Money Management Part 1

I. Debt Perceptions – The Consumer Culture in America

To owe someone $8,000, for about $6,500 worth of stuff, and be enslaved to paying a small fee of it every month, for 15+ years is normal to most Americans. The average American household, according to many statistics, is over $8,000 (if not 9,000) just in credit card debt.

This doesn’t include the $200,000 house that you will pay approximately $303,000 with mortgage, or the $25,000 car you drive that will end up costing you closer to 30 after it is all said and done. Oh, and did I mention the $50 a month for the new furniture, $30 a month for the new computer, and the $15 a month for the new washer you had to buy because the old one unexpectedly broke down?

Such is the way of life for an average household. Enslaved, almost quite literally, to the monthly payment. A simple purchase transaction goes something like this:

Consumer: I’d like to buy this item.
Business: Great, how about we sell this to you at 28% interest?
Consumer: As long as the monthly payment is not more than $40 it’s ok!

It has gotten to the point now, that even experts differentiate now between “good” debt and “bad” debt. One article I came across said,

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…experts say, your total monthly long-term debt payments, including your mortgage and credit cards, should not exceed 36 percent of your gross monthly income.

Hold on. That sounds nice, but let’s rephrase it. For every dollar you make (after taxes), you should keep only $0.64 for yourself, and pay $0.36 to the bank. That’s for your long term debts. As interest accumulates, is there any hope of ever paying it off? Of that 36 cents there is a good chance that 24 cents are going to interest/fees, meaning only 12 cents will actually go to the principal amount. That is for every dollar you earn. Put it another way, for every hour you work, 15 minutes of that hour are for the privilege of paying someone back more than they lent you, so you could enjoy something you cannot afford in the first place. And this is recommended by experts. Does anyone see anything wrong with this picture?

Did you know, that for every dollar a credit card company collects in principal, they collect $2 in interest/fees?

I remember a conversation I overheard between 2 people at work. One was mentioning how his family was doing Dave Ramsey’s debt snowball plan to get out of debt (a lot more on this later in the series), and the other person responded by saying, you mean completely out of debt? He said yes, and she said, “Why? It’s good to have some debt.”

If you watch TV, you cannot help but see this new Visa commercial where a person who is not paying with Visa is all of a sudden disrupting some kind of flow everyone else has going on – i.e. to pay with anything other than a credit card is now slow and uncool. This is the culture we have created. It was not terribly long ago that fast food chains did not accept credit cards, now they happily take any card you have, even for 99 cent chicken nuggets. Alhamdulillah, our halal meat store owners are still keeping it real though, with their hand written signs posted at the one cash register with a working credit card machine, “No Card for Less Than $10 Charge. Thanks You, Management.”

There is no concept of saving up and buying something on cash. In a world where installment plans are the bread and butter of a Sunday ad paper, people simply think that to purchase any item, it must be on credit or on payments. Car ads don’t even advertise the price anymore! New Accord, $199/month. Does anyone even care what the bottom line is on these items?

In fact, the consumer culture has made it ‘financially’ attractive to open a credit card account. Purchasing furniture? Put it on the store brand credit card, and save 10%! Do you buy gas? If so, then open up a British Petroleum credit card to get 5% back on your gas!! That’s right, to save 15 cents a gallon, you simply have to sign over your financial future. And don’t forget about the rewards!! If you spend $10,000 on your credit card, you can get a $75 gift card to Babies R Us or Banana Republic! It doesn’t take an MBA to figure out the faulty math here. They would not be offering these things if the vast majority of people did not end up paying significantly more than the ‘reward’ amount back in interest.

It is no wonder that this cycle has created an entire generation of paycheck-to-paycheck households. How much can you truly enjoy all this stuff when most of your paycheck is spent before you even receive it? Most of these households have no chance at ever establishing any kind of savings. If an emergency comes up, just add it to the (ever expanding) line of credit that you have. It’s no surprise that things like predatory lending (the practice of a lender deceptively convincing borrowers to agree to unfair and abusive loan terms, or systematically violating those terms in ways that make it difficult for the borrower to defend against) are on the rise. Some are faced with the choice of either payday loans, cash advances, loans based on car titles, or other such abusive practices in order to prevent defaulting on their credit cards, car payments, or worse, house payments. It should come as no shock then, that things like house foreclosures are on the rise.

This drive to attain material goods is causing families to lose their homes, declare bankruptcy, have their marriages split apart – all because of their debts. It is a vicious animal that does not get much attention. In the consumer culture we live in, credit is made out to be this great thing that allows you to get everything that you need easily and ‘affordably.’ In the next part of the series we will explore the Islamic view of having debts insha’Allah.

For a better picture of the ideas expressed here, I very highly recommend watching the movie Maxed Out, a documentary about the debt crisis in America. If you simply own a credit card or have ever contemplated having one, much less have one with money you owe on it, this is a must see.

Coming up next… What Islam says about debts.

38 / View Comments

38 responses to “Muslim’s Guide to Debt and Money Management Part 1”

  1. homeyk says:

    what abt debt with no interest. 0% apr? paying full every month on credit cards w/o interest.

  2. ibnabeeomar says:

    that will be covered in future posts in more detail inshallah… but in general.. that question is the same as this:

    what about a person who just drinks responsibly, only one glass a day?

    and to quote homer simpson, “in theory…communism works” (in theory!)

  3. Susan says:

    There is a Dua’ to help us get out of debt and the grief and anxiety which accompany debt.

    It is found in the Hadeeth where the Prophet sallallaahu ‘alaihi wa sallam went into the mosque one day and found Abu Umaamah, may Allaah be pleased with him, and said: “O Abu Umaamah! Why do I see you sitting in the mosque when it is not prayer time?” Abu Umaamah, may Allaah be pleased with him, replied: “It is due to Anxiety and grief, which resulted from debts that I owe.” So the Prophet sallallaahu ‘alaihi wa sallam said: “Shall I teach words which will take away your grief and by which Allaah will help you repay your debts, if you were to say them?” Abu Umaamah, may Allaah be pleased with him replied: “Yes! O Messenger of Allaah.” Thereupon, the Prophet sallallaahu ‘alaihi wa sallam said: “Every morning and every evening say, O Allah! I seek refuge in you from anxiety and grief, weakness and laziness, miserliness and cowardliness, the burden of debts and from being over powered by men.” After this, Abu Umaamah, may Allaah be pleased with him, commented that: “I did this and Allaah relieved my sorrow and anxiety and helped me repay my debts.”

  4. ibnabeeomar says:

    theres a good article i just saw on readers digest that touches upon some things that will be highlighted in some of the later posts on this topic inshallah

    http://www.rd.com/content/secrets-of-successful-entrepreneurs/

  5. 1/2AWiseMan says:

    Jazakallahukhair for the excellent article.

    I’m really looking forward to future posts.

    People may think they own something, but wait till they miss 2 payments. The real owners will have the house, car, or computer.

  6. kd says:

    I know you said that homeyk’s question will be answered in the next segment of the article, but I don’t understand that ‘in general’, how is paying off your debt without any interest the same as drinking responsibly? Drinking is haraam. Having debt isn’t haraam, is it? it’s just that one must hurry to repay it. perhaps you can clarify in general…or i will patiently wait for part 2 :)

    btw, great topic discussion! mashaAllah!

  7. ibnabeeomar says:

    kd – sorry i didn’t mean from a halal/haram point of view. i just meant that in practice, yes, there’s always going to be people who can stick with paying it off every month, etc. however, the majority of americans (not necessarily muslims) cannot do it.

    also, im quite positive that the majority of muslims who have any credit card debt do so, having gotten the credit card with the intention of paying it on time every month. and people still inadvertantly fall into ribaa by accidentally making a late payment, etc :)

  8. ibnabeeomar says:

    and yes theres lots coming in the future parts, first couple of posts are overview types, nitty gritty is coming towards the end

  9. AnonyMouse says:

    As I type this, my dad is actually advising someone regarding this very issue of debt and money management.

    The one thing he finds incredibly frustrating and difficult to understand is how people purposely go ahead and buy things they can’t afford, and then ask for zakaah and sadaqah to pay off the interest!

    Hmmmm… time for some masjid workshops on this topic!

  10. zfnd says:

    “Alhamdulillah, our halal meat store owners are still keeping it real though, with their hand written signs posted at the one cash register with a working credit card machine, “No Card for Less Than $10 Charge. Thanks You, Management.””

    oh that’s too classic lol.

    Love the ‘series’ theme. Anxiously awaiting student loan discussion…

  11. inexplicabletimelessness says:

    ” Anxiously awaiting student loan discussion… ”

    me too!

    Also when we use the word “credit card” we are not referring to debit cards interchangeably, I assume?

    Islamically, is there any difference of opinion on debit cards (sorry if this is tangential, I am just curious)

  12. nafsee says:

    Western society is based on using plastic to purchase anything and everything. I find debit cards a good idea because the amount purchased is withdrawn from your bank account right away. Credit cards can be used responsibly but even if the card is temporarily at 0% interest free, sometime later (6 months or 1 year later) it will hike as high as 20% APR. I used to use a 0% APR credit card but then stopped because I found just using one debit card is more efficient for me and I don’t have to worry about any hidden charges or change of interest rates.

    I would like to know the perspective on taking interest free loans. I find it very hard to save up for a car in full (even a decent used car), but with a 0% APR loan it’s a lot easier to make a purchase and then pay off the debt quickly.

    I also would like to know what are the alternatives to paying for college and a car instead of taking loans. From what I see and know I don’t see any alternative to the home mortgage system. Also, I don’t understand how someone who say makes $50K/year can buy a $250,000 home. My husband’s brother paid for his first home in cash with his savings 4 years ago. I think that is wonderful. No home payments for life. I don’t know why this system isn’t encouraged. It seems ppl will do anything to set their foot in a home right away. Most of the ppl I know who have a mortgage struggle every month to pay it. Both spouses have to work just to keep the home, furnishings, babysitter/daycare, and two cars. They also use the ‘tax break’ theory as an incentive to have a mortgage. I still don’t see any benefit in that if the mortgage is based on riba.

    Can’t wait to hear more on this series!

  13. me says:

    i am so glad i live in pakistan..away from the system that enslaves people to credit cards and interest and everything u seem to own ..is not really yours!
    alhamdulillah alhamdulillah alhdmulillah

  14. me says:

    alhamdulillah**

  15. Abu Bakr says:

    Sadly, it’s coming to Pakistan… everything can now be bought on credit and installments, even home appliances. If it hasn’t come to your area, then Alhamdulillah. If it has, stay away.

  16. inexplicabletimelessness says:

    “Sadly, it’s coming to Pakistan… everything can now be bought on credit and installments”

    So true. Very sad because now that credit cards dominate peoples’ lives there, in cities like Karachi with already a lot of traffic, there are 100s of cars/pollution being added to the already hectic roads.

    On the other hands, there are a bunch of Islamic banks rising and increasing. Scholars such as Mufti Taqi Usmani are very influential in bridging this gap between modern economics/banking AND Islamic values.

  17. ibnabeeomar says:

    interesting article.. but i dont think anyones saying dont spend — just dont spend what you dont have :)

  18. Angie says:

    I agree with AnonyMouse, money is scary. Can’t wait for the rest post on this issue in sha’ Allah.

  19. Waleed says:

    I found this article from soundvision that I saw before and i found it- Its on how to teach your kids to manage money

    http://www.soundvision.com/Info/life/20kids.asp

    Also, can you discuss things like La-Riba or Guidance financial organizations how they can help and how they are halal?
    JA

  20. ibnabeeomar says:

    Those will be covered towards end in house buying inshallah

  21. Hwarang says:

    to get out of debt read suarh mulk before you sleep…also it will save you from grave punishment

    I am out of debt Mashallah the dua worked I got ..also there’s individual duas one can read found in books such as Hisnul Muslim.

  22. […] Guide to Debt and Money Management Part 6 Intro | Part 1 | Part 2 | Part 3 | Part 4 | Part 5V. Cars, Houses, and ….. oh yes… STUDENT […]

  23. […] This was a hot article from Muslim Matters on controlling your debt. […]

  24. […] | Part 1 | Part 2 | Part 3 | Part 4 | Part 5 | Part […]

  25. […] | Part 1 | Part 2 | Part 3 | Part 4 | Part 5 | Part […]

  26. […] Hate Receiving or Giving Interest? Well if your a Muslim you certainly do. If your not, then you still should because if by any chance we fall in debt and sink deeper into it, we become financially enslaved to the ones we owe. It’s strictly prohibited in Islam and you can read a great article on a guide to debt here from MuslimMatters.org. […]

  27. […] Hate Receiving or Giving Interest? Well if your a Muslim you certainly do. If your not, then you still should because if by any chance we fall in debt and sink deeper into it, we become financially enslaved to the ones we owe. It’s strictly prohibited in Islam and you can read a great article on a guide to debt here from MuslimMatters.org. […]

  28. […] Guide to Debt and Money Management: Intro | Part 1 | Part 2 | Part 3 | Part 4 | Part 5 | Part […]

  29. AK says:

    What a greatly written article love the simple common sense logic written all over this post. The hikma that this brother has put in this post is so true to the contemporary problems that are occurring in the world. Man that’s why i try my best to avoid any type of interest in my daily chore that regard to financing. I recently realized how much i have spent over all in the past 5 months then i could have possibly saved if i had the tangible cash, although i use my credit card but i always try to pay it before the interest catches me. Now that i think of IF i was using cash i would have not spent it on stuff which the did when i use my credit card because it so convenient to use a card and have no worries when you know you can pay it later all it was doing is bring my cash flow to zero and bringing me to a point zero start every month. Although i take extra precaution about owing any financial institution, Alhamdullilah I have no debts anywhere. Great work Brother Omer keep bringing the facts to us about the sad reality of our times.

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