Some people use credit cards for everything and happily charge everything in sight, while others think credit cards are from the devil and we should avoid them at all costs. As is usually the case, the answer lies somewhere in the middle because a modest, responsible use of credit cards can be of great benefit. Extravagance is highly condemned in Islam, and the same should be applied for credit card use.
If you take a look in a purse or wallet of any American, you will most likely find a credit card or two (or three, or more). The problem is that while many people have credit cards, many of them do not know how to use them responsibly or how to use them to their benefit. According to creditcards.com, the average cardholder has almost four cards, while 1 in 7 people have 10 or more cards. With that many cards circulating in the country, it would be prudent for people to know why they have a credit card and how they can best use it.
Credit cards are a tool. And just like any tool in life, it has the potential to be harmful if not used correctly, and beneficial if used the way it should. A credit card is essentially a free 30-day loan, with conditions of course. The main condition is that you pay it back by the due date, which is the problem that many Americans have nowadays; as they spend on anything and everything they can, they are soon stuck with a bill they cannot pay off in full. This is when the high interest rates kick in. We all know charging high interest rates can be usury and is forbidden in Islam, but credit card companies have no such qualms. Once you are not able to pay that balance back in full, you will be hit with ridiculously high interest rates, sometimes as high as 20%. This can be devastating to a family trying to make ends meet. Every effort should be made to pay off the debt. A logical way to do this is to organize your cards by interest rate, and try your best to pay off the highest rate card first, as this is the one that will cost you the most in the long run. Credit card debt can be painful, but action needs to be taken to pay it most effectively.
That said, let us go over some of the benefits of having a credit card. One of the major benefits overlooked by many is that a credit card is a major component in having a good credit score. As creepy as it sounds, a company called the Fair Isaac Corporation (FICO) has knowledge of our financial habits. They know when we open our credit card accounts, get a car loan, are late for a bill or whether we are paying our student loans on time. They use this information to formulate a FICO credit score which is a number between 500 and 850, representing our risk to any company that gives us a loan. The lower the number, the more risky you are and the less likely you are to get a good rate on a loan, or even get one at all. A high number however can get you the best possible rate on a loan. This is useful when we get a loan for a car or a house, which many of us will do at some point. Having a good credit score will save lots of money over a lifetime, and it is an easy thing to do. One of the major components is how we use credit cards and if we pay them back on time. If you have never made a late payment and do not tend to max out your cards, you should generally be in good shape. Responsible credit card usage is not the only factor in a good credit score, but it is a major one and easy one to achieve.
While helping your credit score is arguably the main benefit of credit cards, there are others as well. From a financial planning standpoint, credit cards are handy because they can give you a line by line history of where you are spending your money. With this information, it is easy to find problem-spending areas and make the proper adjustments. Another benefit is convenience. While this can also be a drawback if taken too far, the convenience of credit cards makes them attractive as you can simply pull out your card when you do not wish to carry cash around or have fallen short of it. Finally, credit cards that give you rewards such as cash back are useful as well. These should only be used if you do not have any credit card debt and can be tailor made to suit your life. If you do a lot of driving for example, a gas reward credit card would be a good choice. If you do a lot of traveling, a travel rewards card would be suitable. While you should not spend extra just to get certain rewards, getting something back for purchases you already make is always a good thing.
Some people use credit cards for everything and happily charge everything in sight, while others think credit cards are from the devil and we should avoid them at all costs. As is usually the case, the answer lies somewhere in the middle because a modest, responsible use of credit cards can be of great benefit. Extravagance is highly condemned in Islam, and the same should be applied for credit card use.
