The magic of credit cards
Credit cards are a tremendously powerful tool for financial independence. Some Muslims tend to avoid credit cards because they fear paying interest. But when we start to understand how credit cards work, we can enjoy the many benefits they provide while simultaneously circumventing the possibility of paying interest. Credit utilization is a non-negotiable in order to be successful in our economic landscape. So let’s get into it:
Fraud Protection - When using a traditional debit card, if your card or account information is stolen and any unauthorized charges are made, it’s important to remember that your money is being used for those purchases. Most credit cards offer fraud protection. So if you flag a transaction as invalid with your credit card company, you will not be responsible for paying for the charge. Once money from your debit account is taken, it is close to impossible for the debit card company to retrieve it. After reporting fraudulent credit card charges, the card provider will likely erase those charges from your statement. This is much easier to do because the essence of a credit card is that you are borrowing money from the credit card company until it comes time to pay your balance. In short, they will cover the cost of the misused funds.
Building/Improving Credit Score - Credit score is a significant indicator of an individual’s financial health. If your credit score is low, lenders will be less likely to trust you with their money. This also means that you will receive more unfavorable conditions on loans, insurance payments, etc. If your credit score is low, you will end up paying more money over time than someone who is in a better financial state. This feels counterintuitive because people with higher scores are generally less in need of financial assistance, but the system is created to reward good behavior. So make sure to take some time looking at your score and finding ways to improve it.
Benefit From Rewards - Credit card companies want to incentivize consumers to use their cards. They do this by offering attractive rewards options - typically through a points system. My favorite and most used card - Capital One Venture - rewards you with 2 points for every $1 charged to the card. The points can then be used on airline tickets, airbnbs, hotels, car rentals, and other travel expenses. If you don’t want a travel card, credit card companies will also offer discounts or rebates on shopping. And some cards, like the Capital One Venture card, do both! In an effort to accumulate as many rewards as possible, I put every possible charge I can on my Venture card. I use other cards when special 0% interest financing is available, but all of my other expenses that do not require direct payment from my debit account will be charged to my Capital One card. Each year, I save hundreds of dollars on travel expenses through this method.
So how should we go about using credit cards without accumulating interest? The most vital piece is ensuring that you don’t overspend. Check your credit card balances regularly and be mindful of how much you are spending each month. When it comes time to pay your credit card balance every month, pay the statement balance in full. Credit card companies charge interest when users avoid paying the full balance on their cards. They will provide you with a minimum payment option, but if you only pay the minimum, they will attach exorbitant interest rates to your account balance. The safest way to avoid paying interest altogether is to pay your balance in full.
When choosing the best credit card for you, do some research on the credit score range needed to qualify and ensure that your credit score is around that range before applying. Also make note of the rewards offered through that credit card company. If you enjoy traveling, there are strong travel credit cards on the market. If you prefer discounts on everyday purchases, find a card that provides those benefits. NerdWallet provides an excellent analysis of the best credit cards every year. You can find their list of 2023’s best credit cards here.