Intro | Part 1 | Part 2 | Part 3

III. Why Muslims are in Debt – Money Myths!

The statistics from the previous section are important to keep in mind to realize how slippery of a slope it is to be involved in debt (whether it be halal or haram debts). Just last night I saw a statistic on the Fox Business network that American credit card debt is over $1 trillion.

The truth is, Muslims and non-Muslims are very much alike in issues of debt – except that ribaa [interest] has been made haram (and not just haram, but “haram haram“) for us, so the issue is compounded greatly. People simply do not have education on finances. I certainly do not ever remember being taught in school how to budget money, how to manage household finances, the best way to purchase big items, the benefits of car leasing vs. buying, etc. We learn how to calculate compounded interest in math class, sure, but we do not learn how to actually manage money. Would America be in the shape it is in if it was taught?

Dave Ramsey [can you tell I really like this guy?] has a great saying that money is only 20% knowledge, and 80% behavior. I can sum up the entire series on debt for you right now:

Make sure your expenses are less than you make, save the rest, and don't buy anything unless you have cash for it.

That is, in reality, all the knowledge you need. The 80% behavior comes in because people simply do not know how to do that. Seemingly well educated people are completely clueless on how to handle money. Another Ramsey quote that cracked me up the first time I heard it is referring to this as 'Stupid with zeros at the end.' Thomas Stanley wrote a book called the Millionaire Next Door that shows in detail that this is, in fact, how the wealthy live (really, no payments?).

If you apply the principle in the quote box above, insha'Allah you already know everything you need. Applying this principle should save us from at least 80% of the fatwas we end up asking and are still looking for solid answers to. But, life isn't that simple is it? We don't live in a society that is conducive to this ideal, so we fall into the traps and myths laid out for us.

An ounce of prevention is better than a pound of cure.

Do not jump into this series assuming you are doing ok. Even if you are not in debt, there is a good chance that you probably will be (even if it is “just” a car or house). And if you are in debt, but think you have it under control, don't. It does not take much to spiral out. Everyone knows the analogy. If you throw a frog in boiling water, it will jump out. If you put it in cold water and slowly keep turning up the heat until it reaches boiling, it will never notice.

Myth: Debt is a tool to buy what you aren't able to.

Let's say this again. If you aren't able to buy it, then don't.

This is perhaps the greatest myth out there. Everyone simply thinks, that debt is 'just the way of doing things.' If you want to buy a car, well, you take out a payment. If you need a mattress, only an idiot pays $500 up front when they can split it up into easy monthly payments over 24 months. And one more example, that honestly I would think was a joke if I myself did not witness this: I was working as a cashier at an uppity clothing store a few years back before starting college, and I remember that about 2-3 times in a span of 6-8 weeks, people would come and buy $60 clothes on layaway. Sixty bucks!! This is society. People are so utterly desperate to get something they can't afford right now that they just keep taking debt here, debt there, even for relatively small amounts!

The following from Dave Ramsey's Total Money Makeover (we're going to cover this book in detail in the how to get out of debt section) is a great insight on this issue,

My contention is that debt brings on enough risk to offset any advantage that could be gained through leverage of debt. Given time, a lifetime, risk will destroy the perceived returns purported by the mythsayers….I have even sold rental property that was losing money to investors by showing them, with very sophisticated internal rates of return, how they would actually make money. Only after losing everything I owned and finding myself bankrupt did I think that risk should be factored in, even mathematically.

Islam has taught us that debt is not a tool, but a last resort. And then on top of that, Islam has taught us not to involve ourselves in interest at all, may Allah (swt) protect all of us from it.

Myth: I need a Credit Card to Build 'Credit'

Credit score is usually the domino that starts the downfall. Get a credit card in college, and establish your credit. For what? To get higher credit limits on credit cards you shouldn't have? To get a better APR on your car purchase? Really, what it boils down to is establishing good credit so you can get a good mortgage. The reality is, you only need good credit in order to enable you to take on more debt so that you can get more stuff – stuff you don't need, with money you don't have, to impress people you don't like (quote credit for that to Sh. Abdulbary Yahya :) ).

Seriously though, why do you need credit? Ask yourself that question honestly. Come up with a list of reasons it is necessary to build good credit. Utilities? The first time you are doing this, you may need to make a cash deposit if you don't have good credit. Once you have done this though, the deposit is usually refunded back if you maintain a good payment history, and now they have you on record as being in good standing. We'll cover house and car buying towards the end, but really unless you are trying to get something outside of your means, you don't need great credit for it, and you can establish it without the use of a credit card.

What's that? Establish credit without a credit card? It's called a debit card. Gives you all the same 'benefits' like being able to check into a hotel and rent a car, while at the same time taking money straight out of your account every time you use it. But since it is usually a Visa, or at the least can function as a credit card, it gets reported to all those same credit agencies to factor into your magic number! Most banks offer a free checking account with a Debit/ATM card with unlimited use. I have heard of some smaller banks charging fees if you swipe your debit card as 'credit' a certain amount of times, or for a certain dollar amount, but I don't think that most do. At the least, I know that Bank of America and Wachovia don't. I swipe my debit card as 'credit' all the time, especially when getting gas since I am paranoid about typing my pin number in public. And yes, I have used my debit card to purchase things online – from books on Islamic websites (funny that this is our benchmark for “less secure” online transactions ;) ), hotel reservations, and even plane tickets!

Myth: Credit Cards – It's Not Interest If I Pay On Time, and 0% is Same as Cash!

This is probably the most contentious issue we face day to day in regards to our finances. Putting things on our credit card, and buying things we can't yet afford at 0%. Now let's get one thing straight. If you don't use a credit card, and you buy everything with cash/debit – then you don't need to worry about any of this! If you follow the principles laid out earlier, you have just saved yourself a lot of headache. For the other 95% of us though, we have to look at it in more detail. Oh, and don't forget you massively reduce the risk of identity theft by getting rid of your credit cards :)

First we'll take a look at whether or not it is even halal to use a credit card even if you pay it off every month and never give a single penny in interest. According to Sh. Ghassan Barqawi, an expert in Islamic Finance, it is not. The ribaa mentioned in the Qur'an and Sunnah is exactly the same as that of a current credit card contract. [Please refer to his lecture on 0% Interest which is the basis for the majority of my notes that follow here. He is the same one who did the CD series on how to buy a house Islamically referenced in an earlier comment on this series.]

When you sign up for a credit card, you agree to pay off the amount due at the end of every billing cycle (i.e. every month). If you are unable to pay the full amount due at the end of the month, you pay interest on the amount and delay the full payment. By merely signing up for the credit card, you agree to these terms and conditions (otherwise, obviously, they would not issue it to you).

This contract existed in the time of jahiliyyah. The only difference now is the plastic.

According to Sh. Ghassan, any contract mentioning interest in any way, shape, or form is unequivocally haram.

Allah (swt) says in the Qur'an (the meaning of which is),

O you who believe! Eat not Riba (usury) doubled and multiplied, but fear Allah that you may be successful. (3:130)

Many people make the mistake of thinking that our contemporary system did not exist at those times, therefore something else is mentioned. However, a look at what our scholars have stated over the centuries shows the opposite.

Ibn Battaal al-Maliki (died 449 AH) said,

The ribaa of Jahiliyyah is that they used to lend a dirham (silver currency) for 2 dirhams, or a dinaar (gold currency) for 2 dinaars for a certain period of time. When the time of payment became due, they would say either pay us back or we will increase the money (so instead of 2 dirhams, they increase the amount). Every time they would delay payment, they would increase the interest on the interest, until it multiplies over.

In Muwatta imam Maalik there is a saheeh narration from Zaid b. Aslam, a tabi'ee who died 136 AH,

During the time of the Sahabah, the ribaa of Jahiliyyah was that a man would have money lent to him from another man on the condition that it would be paid on a certain date. When the date would come, the lender would say either you pay now, or we increase the amount. If he paid what was due, there was no extra charge, and if he didn't the full amount was delayed but the payment increased.

Does this sound any different from a modern credit card contract? Just because people don't know that it didn't exist before doesn't meant that it didn't.

Despite having the intention to pay on time, according to the Qur'an and Sunnah it still constituted interest.

Imam al-Jassaas al-Hanafi (d. 370) said,

The ribaa of Jahiliyyah was a delayed loan with a conditional interest, and the interest was payment for the time [i.e. that of inflation, or 'renting' the money and adding value to keep the 'purchasing power' of it the same], and Allah made this compensation for the time haram.

There are numerous statements from the classical scholars indicating this, but this should be sufficient for purposes of this article, you can always refer back to the original lecture for more.

Also regarding some of the 'ulemma who have ruled it is ok to deal with such credit cards, Sh. Ghassan mentioned that many of them unfortunately are not fully aware of the technicalities of the contract.

Many fataawa have been issued regarding the use of credit cards, for instance, Dr. Ali al-Salous – AMJA, and Ibn Uthaymeen (rh). I'd also like to mention that some of the fataawa I found that allowed for them were based on questions building up that it is a hardship not to have it. However, as will become evident throughout this series, I do not feel that there's a legitimate case of hardship that requires the use of a credit card in this country (not to the extent that I read in one such fatwa that not using a credit card would prevent the person from using many services and cause “unbearable” hardship), especially when a debit card can be used for everything a credit card is needed for. Even for online purchasing, you can get an alias number that will still deduct from your debit card. The only exception I can think of may be renting a car [you can read the debit card policies of major car rental agencies here]. The only limitation of a debit card is that it will prevent you from taking on any debt. In any case though, regarding that exception there is a good answer from Sh. Ibn Uthaymeen on this.

There are many Americans living without credit cards, and not just the wealthy either. This quote from a fatwa by AMJA was inspirational,

There are many Muslims who live in the USA and avoid usury. Our persistence in observing our religion will lead us to prosperity in this life and the hereafter. There are already many attempts at accommodating the needs of Muslims in various areas of financial transactions. I just read that Caribou Coffee, the second largest coffee house in America, promised its shareholders that they will not sell porn or pork, nor will they charge or pay interest. This was understood by the observers as a clear indication of their interest in attracting Muslim investments. “Victory is but the fruit of patience for one hour.”

Practically speaking for day to day there is no real need for it. All 'services' such as phone, utility, cellphone can all be set up to pay from deducting from your bank account, or they will accept checks as payments. Personally, I use online banking (sending electronic checks) for all such utilities.

Then comes the question of 0%.

Essentially, the 0% contract is the same as a credit card contract. The only difference is a longer grace period, maybe 90 days instead of 30 days. The other type of 0% contract is one in which interest accumulates for the 'grace period.' So for example, you buy $1000 furniture with 5% interest, but 6 months “same as cash.” If you pay the 1,000 within the 6 months fine, but if you don't pay it, they go back and calculate the interest for the first 6 months as well.

In Dave Ramsey's book, he mentions a statistic that 88% of these types of contracts are converted to debt because people do not pay them on time. If you get involved in this, you are playing with fire (literally). Also the 0% is not the same as cash. Realistically speaking, if you went to buy a fridge, and they are offering 12 months 0%, and you said you are willing to pay cash, they would probably give you a discount!

All this comes down to is saving your money and waiting to get what you want to buy. Of all people, Muslims should be most familiar with enduring some hardship to get a bigger reward later. If 90 days is the same as cash, then save your money for 90 days that would have gone to they payment, and then buy what you need. If you need it earlier, use money from your savings (more on establishing this later).

And how can anyone say with 100% certainty that they can predict the future, and know they will pay it off? How bad would it be to die 2 months into a 90 day “same as cash” debt that you shouldn't have been in, and be held hostage from Jannah because of it?

Fatwa vs. Taqwa

In fairness, it should be mentioned that there is no doubt fatawa exist on the permissibility of using credit cards if they are paid off on time. Obviously, what is presented here is what I feel to be the stronger side of the issue. In either case though, whether it is halal or haram technically speaking, a believer should strive their utmost to fear Allah in all aspects. In part 2 of this series, the seriousness of debt was discussed. Even if you consider taking a credit card halal, stop and ask yourself, why do you need it? Even speaking from a strictly fiscal perspective, chances are you are only using it to get something you cannot immediately afford, or don't need. Think about going to the mall with $100 cash in your wallet, and going with a credit card that has 0% on purchases for the next 12 months. See how much stuff you buy. This is where the taqwa comes in. Don't get the credit card if you don't need it, otherwise you are putting yourself on a path to destruction, and I mean that even just primarily from the perspective of your dunya affairs. If you don't have the cash, it means you can't afford it.

With that said, if you are going to use a credit card for renting a car, buying things online, or any of those other scenarios that I am sure are going through your head, then at the least make sure that you immediately take the money out of your account and pay the credit card right away. I know there are certain circumstances where it is easier to use the credit card, but what I hope you can take away from this is to treat those exceptions as exceptions and take care of them immediately. Don't make credit cards your day to day standard :)

Lastly, one more reminder on what can happen to you even if you are paying off your balance on time:

Even if you make your credit card payments on time, the credit card bank can raise your interest rate automatically if you're late on payments elsewhere — such as on another credit card or on a phone, car, or house payment — or simply because the bank feels you have taken on too much debt.

This practice is called the “universal default” clause and increasingly is becoming a standard clause in credit card agreements. According to credit card executives, the logic behind universal default is that the bank is not being unreasonable in raising rates when it has reason to believe that the risk of being repaid by the customer has increased. [PBS Frontline Documentary ]

Coming up next – The evils of interest, and debt freedom.

30 Responses

  1. Al-Karachwi

    Bismillah ArRahman ArRaheem

    Someone once debunked the idea that paying off credit card debts on time makes them Halal as follows: If the credit card contract stated that for every late payment, you would have to drink a glass of alcohol, would you sign that contract too?

    The point, of course, being that even *signing* such a contract is in and of itself wrong, even if the eventuality in a clause does not come to pass.

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  2. DeenDriven

    ibnabeeomar,

    Mashallah, you have a strong basis in knowledge in islamic and finance matter. You should consider doing this full-time to help Muslims, as well as non-Muslims. Consider becoming a finance coach, through some program like DiscoverU

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  3. ibnabeeomar

    deendriven jazakallahu khayr for your comments. doing something like that would take a long time, and require advanced education here (something like an mba) as well as dedicated time in studying shar’iah as well – like sh. ghassan barqawi has done.

    i believe its important to have some muslims get into the field of debt counseling and financial planning alongside a good shari’ah background, and start programs for muslim communities across america – much like dave ramsey has done in the christian community.

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    • Zareen

      Assalam-0-alaikum brother,

      I’m very much interested about the Islamic views on debt and interest. Unfortunately me and my husband have become a victim of this vicious curse and would do anything to come out of it as soon as possible. We pray and work hard every day to become debt and interest free but unfortunately it will take some time as we have predicted due to our current financial situation.

      I’m studying CPA and I’m almost done with my qualification. Inshallah soon I will complete my CPA certification. I have a good understanding of finance and accouting and I would like to ( after completing my education) work for the betterment of Muslims in this regard. I would like to make our lives free from debt and interest and help thousands of other Muslims who are caught in the same vicious circle like us. If you know any organization who are giving such education or are wiling to help people in attaining financial freedom and using their education and knowledge to help others please please let me know. I think that every hardship in life has a lesson to it and I want to do something for Allah and His religion and since I have an accouting and finance background, I want to use this knowledge to help myself and my husband as well as help all the other Muslims.

      Jazakallah khair.
      Wasalam

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      • Zareen

        I would highly appreciate your comment on this as soon as possible.

        Thanks again
        Wasalam

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  4. Abu Hudayr

    what about using cash back credit cards? where they give you 1%, 3%, 5% cash rebates for your purchases… you could actually make money (if you are disciplined enough) ;)

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  5. ibnabeeomar

    thats the same reasoning. why would they give you money back unless they were making money off of it? also, the rebates aren’t all they’re cracked up to be.. you have to spend at least a few thousand dollars on your card to get up that high. i will be quite honest here, it was precisely because of those types of rewards and cards that i started using more cards – 5x points back on grocery and gas, etc etc. it doesnt end well :)

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  6. ibnabeeomar

    plus i’m not sure if the cashback constitutes interest or not.. from what i was able to find it seems there’s some leniency on getting gift cards for redemption, but i dont know about cash back.

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  7. mcpagal

    Salaam, this is a fantastic series and much needed it seems, from the statistics you’ve given.

    Alhamdulillah, I’ve never been in debt (I would have had no excuse anyway since I don’t ever have to spend my own money, really), but using a debit card is excellent advice and I don’t know why people don’t do that instead of using credit cards. I use my debit card in shops and online all the time and alhamdulillah I’ve never had any problems with it, and there’s no headache of remembering to pay it off since it’s your own money anyway.

    I used to watch this program called Spendaholics, it was about people who were in loads of debt. It was quite good actually, it went into the roots of people’s emotional dependency on spending money as well. But the advice was pretty much the same simple concept: spend less than what you earn.

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  8. mcpagal

    Oh I also have a question: do you have any advice on investing money – or is it better to just leave it sitting there?

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  9. khawla hurayrah

    MashaAllah, very good series. This is what we need to be aware about and to let our children know the perils of Riba.

    May Allah protect us from being overcome by debt. Ameen

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  10. aarij

    Ma sha Allah, this is an outstanding article. May Allah reward you tremendously br. ibnabeeomar.

    One point: I don’t think that the option of using your debit card as credit card is available in Canada. Not that I know of anyway.

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  11. TheSussist

    Great series, great article.

    I’ve had my head in the sand about these issues for quite some time, and wanting to learn more, these series have provided just what I was looking for.

    Keep it up.

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  12. Abu Ilyas

    Masha’allah, this is a very good read.

    I read recently how ‘EGG’ which is an Internet bank based in the UK withdrew credit card facilities from thousands of its customers on the pretext that they had bad credit and were therefore too risky. It later emerged that in fact many thousands of these customers had excellent credit ratings and had always paid off their outstanding balances before any interest was accrued, i.e the bank was simply getting rid of customers who were not paying them interest or late charges.

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  13. Ammar

    I dont think Canada allows you to use your Debit card as Visa, so unfortunately it does become a bit of a hardship, for e.g. signing up for a phone, or broadband access etc requires the use of a credit card.

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  14. Kamran

    as salamu`alaykum Br Omar,

    MashaAllah very nice series. I started reading backwards ;) (i.e. I have read 5 and 4…still need to read all the other parts). A few points I’d like to mention:

    * even to rent, you need to have a credit history. Would ‘visa -debit’ cards be sufficient to get your scores in the high 700 range?
    * These are the incentives I see for using CC:
    - It gives me a yearly summary of all my expenses and which category they fall in. It’s really helpful…but I guess not necessary.
    - Mileage plus points…but I guess that can again be argued it’s just a trap.

    Honestly though, I’m now seriously thinking of getting rid of my CC inshaAllah :) [alHamdulillah I have never been in debt and pay off my CC out on time]

    In terms of saving money as someone asked. Here are my suggestions:

    * if you get a paycheck, most companies (at least major companies) allow you to split your check into multiple bank account. So for example, if you get a check of $1000, you can say that I want $700 to go in my checking account and $300 to go in another checking account. And that could be your saving…and you can make it a rule not to touch that money at all.
    * secondly, put your excess cash in Amana Mutual Funds. I have asked Sh Muhammad AlShareef about it and he also invests in Amana. Also, you can discuss your option with Br Monem Salam from Amana…he was at TDC as well.
    * Consider also getting a Rollover or Roth IRA account with Amana…this was you can save on taxes and save this money for retirement in case you don’t have a 401k account (I know most muslims don’t)

    wassalam
    Kamran

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  15. ibnabeeomar

    wa alaikum assalam,
    jazakallahu khayr.. i dont know anymore about it than what was posted above that i got from ramseys book regarding the credit score thing. i do recall on the financial call with muhammad alshareef and monem salam that br. monem mentioned they have to report debit card usage to the same reporting agencies as a credit card, but i’d have to listen to it again to verify.

    no idea about what kind of score you would get though :)

    btw if you have been using a credit card and paying it off, your score should already be really good.

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  16. Amad

    I have only had american express (does go into credit report) and a check card (does not go into report, hasn’t in mine) for the last 10+ yrs. No problem getting my new car on lease (required credit chk). My score isn’t great but to be honest, if u are not going to be in the market looking for an interst based investment or property, I am not sure you are ever going to need that great score. Keep bad stuff out of the reports, and everything else will work out i/a.

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  17. Kamran

    Hid,

    This is what I said:
    “you can say that I want $700 to go in my checking account and $300 to go in another checking account.”

    I didn’t mention savings account. I said “checking” account…so you just have two checking accounts. And the way I usually do it is that I get a credit union checking account cuz some of them don’t charge ATM transaction fee ANYWHERE in the world. So alHamdulillah, like when I went overseas last time, I was able to withdraw cash from my account without having to pay the extra “$3″ for ATM transaction cost. (or if you’re stuck somewhere with a Seven Eleven ATM, you can use this card there)

    hope this helps.

    ibnabeomar, yes alHamdulillah my credit score is excellent and therefore I guess I can’t really justify keeping the CCs other than the reasons I mentioned.

    wassalam

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  18. Hid

    My fault, i have no clue how i read saving accounts there (well my dad has been pressuring me to get one so it has been in my mind =)

    ”I get a credit union checking account cuz some of them don’t charge ATM transaction fee ANYWHERE in the world. ”

    JazakAllahu Khairun for this, ill see in my bank has this option as well =

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  19. Shahid

    I have a partnership with a Muslim brother.
    His business is totally based on Riba(interest based business)
    Is it haram for me to do business together.
    It is against Islam to do business with somebody whose way of doing business is toally against islamic laws.

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  20. ibnabeeomar

    Shahid – you’d need to consult an imam or maybe use a fatwa service such as AMJA who can go into the details of your situation with you.

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  21. aratuc

    Sukran for spreading the message and truly enlightened me not to vie for the things I am not capable to acquire.

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  22. spirituality

    Hi !
    i have a question regarding cash back with credit card ,my bank basically can give customers cash back if they sign up for a program which is buying items through their card with certain companies such as walmart ect is that halal?to have a cash back from buyng an item ?or is it considered a discount?
    i also have another quesion: i want to go to school but basically i don’t have money for it and i want to study because it’s always being improtant to me ….so what’ the fatwa in getting a loan for education purposes ?i know loan with interest is haram, is there islamic bank in usa ?if so please list them if they loan money for education.

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