Question # 332: Can you explain me the rulings with respect to Credit Cards (conventional as well as Islamic)? Moreover, is it permissible to accept cash back on these credit cards offered by bank?

Bismi-llahi r-raḥmani r-raḥīm,

Assalamu ‘laikum warahmatullahi wabarakatuh,

All praise and thanks are due to Allah (سبحانه و تعالى), and peace and blessings be upon His Messenger (صلى الله عليه و سلم).

Dear questioner,

First of all, we implore Allah (سبحانه و تعالى) to help us serve His cause and render our work for His sake.

Shorter Answer: Credit cards have been a subject of debate amongst modern scholars. The majority of jurists in the East hold that these are haraam due to the invalid conditions of interest (riba) they entail, whereby the credit card user enters into a contract with the bank obliging to pay interest if he delays payment. On the other hand, the majority of jurists in the West, grant special permission (rukhsa) to use credit cards due to the strong need (haajah), severe necessity (daroorah) and absence of immediate Islamic alternatives; on the condition that the user is certain that (a) he will be able to pay the dues on time, will not buy things on instalments and will not fall under the delayed payment charges involving interest, and (b) he restricts his use to objects of clear necessity. If the credit card user is not sure that he/she will pay back before time, then the use of credit card is absolutely prohibited. Next, as for the periodic (e.g., annual) fees charged by the bank for the issuance of credit card is permissible as it could be justified as administrative or service fees.

As for credit cards issued by Islamic banks, it is not possible to pass a ruling on any of these cards without examining them properly and finding out the system followed. For example, the subscription fee by the bank might be greater than the actual expenses incurred by it or delay payment charges might be implied interest, irrespective of the fact that whether the bank benefits from it or donates it to the poor.

As for the Cash Back, if the credit company deducts a monthly subscription (nominal fee) in exchange for cash back, then that money is riba, because it is considered currency exchange with inequality, meaning paying an amount without getting back the exact amount immediately. However, if the cash back received is free of charge, it is regarded as promotion by the credit card company, and is considered permissible.

Long Answer: According to Dr. Salah Al-Sawy, the Secretary General for the Assembly of Muslim Jurists in America: “Credit cards are a subject of debate amongst modern scholars. The majority of jurists in the east hold the opinion that they are haraam due to the invalid conditions of interest (riba) they entail and because they are not the only way for people to get what they need, due to how easy it is to deal in cash or issue Islamic credit cards. [In fact, the credit card user enters into a contract with the bank which means that he is obliged to pay interest if he delays payment. This is haraam, because it is not permissible for a Muslim to commit himself to doing something that Allah has forbidden. (Islam Q&A)]

The majority of jurists in the west, on the other hand, grant special permission (rukhsa) to use credit cards, due to:

  1. the strong need for them,
  2. the general nature of the situation in Western countries that make credit cards necessary, and
  3. the lack of Islamic alternatives,

as long as:

  1. the one using them is more certain than not, that he will be able to pay on time, so that he does not fall under the penalty of the conditions involving interest, and
  2. he restricts his use to objects of clear necessity.”

According to Main Khalid Al-Qudah, Member of the Fatwa Committee of Assembly of Muslim Jurists in America: “Credit cards are basically a contract of debt between a subscriber and a credit card company, such that the company grants the subscriber a loan by way of cash withdrawal, buying merchandise or paying bills.

If the card holder makes purchases using the credit card, and repays what he owes within the specified amount of time, the company does not take more than what the card holder borrowed. However, if he buys things and is late in paying, or buys something in installments with the credit card, or if he uses it to make purchases outside the United States, he must pay the company an extra amount of money that is known and agreed upon; this is riba (interest) and it is haraam (forbidden).

As such, using the card to make purchases or pay bills is permissible as long as one pays back the full amount on time. Being late in payment or buying things in installments, however, is not permissible.

As for cash withdrawal, as long as the money is drawn from one of the credit card company`s own machines and there is no fee for this service, it is permissible. If there is a fee, however, it is not permissible because this would be an increase in the loan, which is riba (interest).

On the other hand, if cash is withdrawn from the machine of another company—even if there is a fee—this would be permissible because the other company is not the one that provided the card holder with the loan. It would simply be acting on his behalf in borrowing money from the credit card company, and taking money on another`s behalf (wakalah) is acceptable (mubah).

Based on the description above, the basic rule is that it is not permissible to enter into this contract, due to the prior consent to pay a known increase on a sum of money, as this is a type of transaction involving riba (interest).

An exception to this rule exists in America because agreeing to pay is one of those matters that falls into the category of something “forbidden for the sake of something else” (haraam li ghairihi). That is because it is a means for dealing in riba (interest). Paying extra, on the other hand, is “forbidden in and of itself” (haraam li dhatihi) because paying extra is exactly what riba is. The scholars of fiqh distinguish between the two situations when issuing a verdict. That which is “forbidden in and of itself” cannot become permissible except by basic, severe necessity (daroorah)—according to its legal, Islamic definition—but that which is “forbidden for the sake of something else” can be made permissible by need (haajah).

The need (haajah) in America exists for this kind of contract. The Muslim—just like any other resident—needs what is known as a credit history in order to buy in installments or rent, and he meets with great difficulty and hardship if he does not have a good credit record. This record can only be acquired by entering into this contract with a credit card company and obtaining a credit card.

On that basis, it is permissible for a Muslim to sign this contract as an exception to the rule, given that four conditions be fulfilled completely. They are:

  1. One must be in dire need of this card; such that great difficulty and hardship is faced without it. (like building one’s credit history)
  1. One must not use it to withdraw cash from the credit card company`s own machine if there is a fee for this service, or buy anything from outside America.
  1. One must repay what he owes, all at once, without being late; [however, if one is not sure that he/she will pay back before time, then it is absolutely prohibited to use it because he/she will be dealing in usury upon whom Allah and His Messenger have announced war]
  1. One must stop using it completely when he has acquired a credit history sufficient to facilitate his dealings and get what he needs.

The following are a number of rules related to this issue:

  1. The periodic fees for issuing this card that are charged by these companies have no relation to the use of the card or the borrowing of money from the company. This is not interest on the loan, so it is acceptable. [In other words, the annual fees for the issuance of the credit card are allowed and could be justified as administrative or service fees.]
  1. If the card holder must pay a sum of money than exceeds the original amount of the loan, even if he is not late in paying, it is not permissible to deal with the company in this situation, because this is clear riba (interest).
  1. It is permissible for a Muslim businessman to take from the card holder the price of his goods by means of withdrawal from his credit card, even if he takes from the credit card company less than the amount owed by the buyer, in the case of a credit card company whose policy it is to deduct a lump sum or a percentage every time the subscriber makes a purchase using his credit card.
  1. Transferring a loan from one company to another is not allowed because the new company takes fees in return for this service, which would be a new loan for the subscriber. Any increase in the amount of the original loan is considered riba (interest), whether the increase is calculated on the original sum of money or is taken as administrative fees.”

[As for credit cards issued by Islamic banks,] it is not possible to pass a ruling on any of these cards without examining them properly and finding out the system followed. In general, there are two issues contrary to shari’ah which the card must be free of:

  1. Where the subscription fee is greater than the actual expenses incurred by the bank in issuing this card, because this additional amount in return for the loan is riba.
  1. Where the bank imposes a penalty in the event of late payment. This is undoubtedly riba, whether the bank benefits from the penalty or donates it to the poor and the like.

…This is what confirms the importance of checking every card before passing judgement concerning it, and not being deceived by the fact that it is issued by an Islamic bank or with the approval of the shari’ah committee. (Islam Q&A)

[Furthermore,] Credit card points and rewards are allowed, whether monetary or non-monetary, as long as you do not pay for this service.  [As for the Cash Back,] if it is a part of a Saving Plan (the term sometimes used in the industry), where the credit company deducts a monthly subscription (usually 5 to 7 dollars) in order for you to receive the cash, then the money you receive is riba, because the Islamic interpretation of this transaction is that it is (currency exchange) with inequality, meaning you pay an amount without getting it back the exact amount immediately. Otherwise, if the cash back received is free of charge, it is a promotion from the credit company, and it is halal. (Main Khalid Al-Qudah, Member of the Fatwa Committee of Assembly of Muslim Jurists in America)

Allahu A’lam (Allah (سبحانه و تعالى) knows best) and all Perfections belong to Allah, and all mistakes belong to me alone. May Allah (سبحانه و تعالى) forgive me, Ameen.

Wassalaam