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Muslim’s Guide to Debt and Money Management Part 3

Published

(Read the Intro, Part 1, and Part 2 before proceeding)

II. Americans in Debt

A) Average Debt

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A quick look at the statistics says 43% of American households spend more than they make. And for every American household with at least one credit card, the average debt is somewhere between $8,000 and $10,000. This is talking about consumer debt. That means, these are the figures without factoring in car payments and mortgages!!

Here’s some stats from Motley Fool:

$1.7 trillion
Total consumer credit.
$8,562
Credit card debt carried by the average American.
$50 billion
Total finance charges Americans paid in 2001.
$1.6 billion
Market capitalization of AT&T — the entire corporation.
78%
Percent of U.S. households deemed “credit worthy” by the lending industry.
1.3 million
Number of credit card holders declaring bankruptcy last year.

Houston, we have a problem.

Wait, not you right? Alhamdulillah, you are one of those few who has a halal credit card since they pay it off every month? The credit card companies love you.

GE Rewards MasterCard holders who pay off their balances each month are charged an annual $25 penalty fee. Industry analysts predict that more credit card issuers will follow GE’s lead.Why are credit card companies doing this? Because 75% of their revenues come from finance charges, and conscientious users who pay their balances in full each month are in effect using the cards for free. This can be extremely unprofitable for credit card companies.

Some credit card companies are imposing penalties that affect all customers, including:

  • Eliminating the 30-day interest-free grace period following a purchase.
  • Charging an over-limit fee if you exceed your credit limit by as little as $1, even if your purchase has been approved over the phone by the store.
  • Imposing a late fee of up to $20 if you miss your monthly payment date by one to three days.
  • Increasing your finance charge if you don’t pay on time twice in one year. Some punitive finance rates range from 24.9% to as high as 32.6%.

According to a BusinessWeek report, total household debt, including car loans, mortgage, and student loans, topped 100% of disposable annual income recently for the first time ever [from Motley Fool].

All this with no hope of paying it off. Consider this: If you have a balance of $4,500, paying the minimum payments would take approximately 40 years to pay off!!

Check out this payment chart from Motley Fool:

Starting Balance Interest Rate Time to Pay off Total Interest Paid
$8,000 18% 30 years $11,615.32
$8,000 12% 20 years, 1 month $5,180.13
$8,000 9% 18 years, 2 months $3,334.52
$8,000 5.9% 16 years, 1 month $1,907.18
* Calculations made by making minimum monthly payments or 2.5% of the balance.

This, is the price, of our consumer culture.

B) Bankruptcy

Bankruptcy statistics are readily available online (go here for a quick recap). Personal bankruptcies exceeded 2 million cases in 2005 [That’s roughly the entire population of a city like Houston]. Some have put the estimate around 1 out of every 53 households! That’s a whole lot of people strapped for cash!

Yasir Qadhi made a memorable quote at this past Texas Dawah Conference:

100% of divorces began as marriages.

And I can say that I am fairly positive that most people filing bankruptcy as a result of consumer debt started out thinking they were going to pay everything off on time and never reach that stage.

The reason we have to discuss bankruptcy here is because when people have finally hit the wall with their finances and don’t know where to turn, they file for bankruptcy to get relief from their debts. In a worldly sense, you have killed your credit rating and have now been ‘branded’ as having filed for it. It will be difficult now to even get things like basic utilities without first putting down cash deposits on them due to your low credit score.

For some people it seems like their only option at starting over. In any case, if you are considering it, then please do 2 things. 1) Consult an imam about the shari’ah perspective on the debts being discharged, and 2) consult a bankruptcy attorney to see if it’s the best option, because this really is a last resort type of thing, though people have rebounded from them. I tried to get an answer to #1, but I was told it’s “complicated” :). I was able to find a fatwa on AMJA regarding, however, it is not detailed.

Dave Ramsey compares bankruptcy to divorce. It is one of the top negative life changing experiences a person can go through (like divorce, disability, and death of a loved one). Most job applications even ask if you have ever previously filed for bankruptcy.

One interesting thing to note about bankruptcies though, is that the leading cause of them is medical bills! Oh, and this includes people with insurance. [Go watch Sicko for more on that one.] While this is obviously a complicated issue that stems from the shortcomings of our healthcare system, one of the issues that compounds it is the fact that most Americans simply do not have money saved for emergencies, and the primary reason for this is not being in control of their finances.

C) Who Benefits from this Debt?

Credit card companies, banks, and lenders in general. They benefit from keeping you tied down to monthly payments. In the Maxed Out documentary, a bankruptcy expert met with executives telling them how they could limit giving credit to people that might be prone to bankruptcy, and how this could help both sides. They simply looked at her and said, it is precisely from those people that they make their profit margins!

This is not surprising when one realizes that truly wealthy people don’t use credit cards or debts to attain what they need!

One article I came across had this quote,

There’s far too much predatory lending going on these days. By and large, banks aren’t really interested in helping their customers, they’re simply interested in bilking them out of a few more dollars each month. That’s why American workers are dubbed “wage slaves” by the people in the know. It’s the illusion of financial freedom in a system that keeps siphoning your hard earned cash, day after day, year after year, until the day you die. And then you get to pay for that, too.

This is really something that does need a lot of research. The people who profit from keeping us in this cycle are the banks and credit card companies. Plain and simple. The more that people continue making monthly payments in interest and fees, the more they make for not doing anything.

Finally, I leave you with an article entitled, I Want the Earth, Plus 5% – A history of money, that is a must read!

Now that this stuff is out of the way, the upcoming posts will start getting into the juicy stuff. In the next post insha’Allah we will look at some common money myths that are perpetuated, and jump headfirst into credit cards.

Keep supporting MuslimMatters for the sake of Allah

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The Prophet (SAW) has taught us the best of deeds are those that done consistently, even if they are small. Click here to support MuslimMatters with a monthly donation of $2 per month. Set it and collect blessings from Allah (swt) for the khayr you're supporting without thinking about it.

Omar Usman is a founding member of MuslimMatters and Qalam Institute. He teaches Islamic seminars across the US including Khateeb Workshop and Fiqh of Social Media. He has served in varying administrative capacities for multiple national and local Islamic organizations. You can follow his work at ibnabeeomar.com.

18 Comments

18 Comments

  1. ibnabeeomar

    January 14, 2008 at 12:46 PM

    i know this part is a bit dry, but the important lessons here are,

    1) the REALITY of the debt situation in america. a lot of people fool themselves into thinking they can be responsible about it and slowly slide off into financial hell

    2) bankruptcy is a very real and very immediate danger for someone dabbling in debt in this country

    3) don’t think that using credit cards is going to benefit you – in the end, all they do is pad the profit margins of corporate execs.

    a lot more to come in part 4 inshallah :)

  2. Angie

    January 14, 2008 at 1:15 PM

    can’t wait!!

  3. Angie

    January 14, 2008 at 1:16 PM

    Helpful Hint: Provide REALISTIC solutions to the problems at hand.

    wa Allahu a`lam.

  4. Irfan

    January 14, 2008 at 2:52 PM

    [Quoted]
    Wait, not you right? Alhamdulillah, you are one of those few who has a halal credit card since they pay it off every month? The credit card companies love you.
    [End of Quote]

    I have a question :

    Is there any credit card that is basically halal, I know that only debit cards are clean as you can spent as much as you have you are not signing any interest based agreement, etc… ?

  5. ibnabeeomar

    January 14, 2008 at 2:59 PM

    irfan, the only thing i can think of is a charge card (i dont know if american express still does these), or something like a visa gift card. these are cards that you put cash into, and then use it as a credit card.

    but in general, a credit card (by definition) is going to have interest clauses in the contract.

  6. reader

    January 14, 2008 at 8:25 PM

    “Is there any credit card that is basically halal, I know that only debit cards are clean as you can spent as much as you have you are not signing any interest based agreement, etc… ?”

    Consider that even if there’s no interest on a debit card, you’re still charged overdraft fees.

  7. hijabhaven

    January 14, 2008 at 11:29 PM

    assalamu’alaykum,
    i think the general understanding is that you should use only your credit card when you know you can pay off your purchase within the month, thus, avoid any interest at all.
    but you know, it is quite difficult to keep track of your swipes with that plastic piece of promise, unless you are extremely disciplined and set rules for what and when you should use your card.

    i’m not familiar with overdraft fees on debit cards as i have never had a debit card. but if there is an inherent interest cost, it’s probably best to steer away from them.

    debt is a dangerous thing and when it accumulates for no apparent reason, it can really push your relationship to the test. i think money is still the major cause of divorces anywhere, not USA alone. we just all have to be careful and the best would be to avoid associating with interest-based transactions. stick to cash alone and manage your purchasing power from there.

    Allah Hafiz

  8. aarij

    January 15, 2008 at 8:54 AM

    amazing series so far, ma sha Allah. probably the best one on MM so far.

  9. ibnabeeomar

    January 15, 2008 at 1:01 PM

    interesting article, americans have cut back on consumer spending:

    http://www.nytimes.com/2008/01/14/business/14spend.html

  10. ittef

    January 16, 2008 at 2:56 AM

    What Angie said.

    This article doesn’t event pretend to be a practical guide. What is the point of posting a bunch of links to the debt situation in America to conclude with an irrational screed against using plastic instead of cash? Please try a thoughtful analysis of handling debt and managing money without belittling the intelligence of your audience.

  11. ibnabeeomar

    January 16, 2008 at 10:40 AM

    ittef – this is a *series* there’s still a lot more to come, including ‘practical’ tips on managing money :)

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  18. JJ89

    August 22, 2012 at 2:21 PM

    The market capitalization of At&t is hugely understated. Please check your facts. 211.03B

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