Do credit card rewards programs have riba?

Anatomy of a transaction

I make the case for why credit card reward programs are halal. Please note that this article does not cover cashback credit cards.

Introduction

Bank of America created the modern credit card in 1958. Their great idea was to charge interest for late monthly payments. To get people hooked, Bank of America mailed out 60,000 credit cards to a city near Los Angeles. And the rest is history.

Card payments had no interest before 1958. The original “charge cards” had “no penalty or interest charges for payments made after 30 days”. They made money by processing transactions with a 7% fee.

Yet, rewards programs are an old idea. In 1793, an American merchant encouraged customers to come back to his store by offering copper tokens. They would get a token for every purchase. They could use these tokens to buy something from the store.

My first punch card was with a Muslim barber. Ten haircuts meant a free haircut!

In the 1890s, “trading stamps” became a thing. Essentially the first mass-scale rewards program. Groceries, shopping centers, gas stations. They gave stamps that could be traded in bulk from the megastore — Schuster and Company. Then, even Kellogg cereal boxes started giving out loyalty coupons.

Modern rewards programs started with airlines (1981) and credit cards followed (1991).

Airline rewards programs began in 1981. The credit card rewards program began in 1991.

Are credit card reward points halal?

Short answer: There is a decent case for the permissibility of some credit card rewards programs. It depends on the credit card reward program because there is so much variation. There is a major difference between rewards cards, as opposed to cashback cards. Allah knows best.

Some important concerns

There are concerns with credit cards, and we will go through them one by one.

1. Asking someone else to make a payment on your behalf

2. Signing a contract to pay riba if you are late to payments

3. Getting rewards in exchange for borrowing from a credit card

4. If rewards are likened to currency, then considering them as a form of future currency exchange could be viewed as a form of riba

5. Credit cards make the majority of their money from riba, not from payment transactions.

The short answer to the above concerns:

In summary, it’s fine to pay someone to buy something for you. There is evidence that our Prophet ﷺ did not invalidate the whole contract, as long as the invalid clause was not implemented. And rewards programs are coupons, not currency.

1. Is it permissible to pay someone to buy something for you?

Yes. By unanimous consensus. We do this all the time already with debit cards. It is worth noting that the Quran has permitted paying the zakat collector. If we can pay people to collect zakat, then we can pay people to collect a flight ticket.

2. Is it permissible to ask Chase to buy something for you, and then you pay back Chase later?

Yes. By unanimous consensus.

3. Is signing a contract with riba for late payments haram? Does that make the whole agreement impermissible?

The issue we face is that credit card contracts necessitate the payment of interest for late payments, a clause deemed impermissible (haram). This clause is present in every credit card agreement

If a contract is valid, but it has one invalid condition, that doesn’t make the whole contract invalid. As long as the invalid clause is not implemented.

In the hadiths related to Barira (R), Aisha (R) wanted to free a slave. But it had an invalid clause on the contract. The Prophet ﷺ annulled the clause, but let the contract go through. This led to the slave being freed.

But there’s more. I’ll reverse this question. If you agree to steal from somebody, but you never end up stealing… have you committed any sin yet? A classic question in fiqh. The answer is no.

The same goes for riba. The sin is in paying riba or consuming riba. Even if a person has the intention to practice riba, but then later does not do it, the person has not yet committed any bad deeds. At least an argument can be made in that direction. Allah knows best.

The Messenger of Allah ﷺ said, “Allah, the Mighty, and Sublime, has forgiven my Ummah for what is whispered to them or what enters their minds, so long as they do not act upon it or speak of it.”

Nasai - Sahih

The Prophet ﷺ said, “Allah ordered (the appointed angels over you) that the good and the bad deeds be written, and He then showed (the way) how (to write). If somebody intends to do a good deed and he does not do it, then Allah will write for him a full good deed (in his account with Him). Suppose he intends to do a good deed and did it. In that case, Allah will write for him (in his account) with Him (its reward equal) from ten to seven hundred times to many more times: and if somebody intended to do a bad deed and he does not do it, then Allah will write a full good deed (in his account) with Him, and if he intended to do it (a bad deed) and did it, then Allah will write one bad deed (in his account).”

Sahih Bukhari

4. Are reward points tied to the purchase or the loan?

The borrower is benefiting from the loan, not the lender. It matters because the lender can’t benefit from a loan. In Islam, the whole purpose of a loan is for the borrower to benefit.

It is worth noting that you will get reward points regardless of whether you pay your loan or not. This shows the reward points are most commonly tied to the purchase. However, you should know that after several months of delinquency, Chase can withhold your reward points as collateral for the loan.

5. Are reward points a type of currency?

No, it’s more appropriate to think of reward points as coupons.

It matters because if it was currency, the Prophet ﷺ prohibited currency exchange in the future. Currency exchange can only be done as a spot transaction.

They do indeed have some currency-like qualities, but they are not currency. Unlike currency, reward points cannot be freely bought and sold in the market due to credit card policies. Doing so may result in the cancellation of your points. Additionally, unlike currency, rewards are usually non-transferable, except for certain credit cards or frequent flyer programs. Furthermore, reward points can expire, unlike currency.

6. When are reward points delivered?

It matters because if reward points were a currency, the Prophet ﷺ prohibited currency exchange in the future. Currency exchange can only be done as a spot transaction.

Rewards points are not granted immediately but after the “statement closing” date. This is not the ”payment deadline”. The “statement closing” date is the date on which your purchases are counted, and you are granted points in exchange and sent a bill. The “payment deadline” comes 25 days after the statement closing date. If you miss the “payment deadline”, you pay interest.

7. Can reward points be exchanged for US dollars?

Yes. But only with one entity. The credit card issuer. You can exchange points for US dollars with Chase, at a disadvantaged rate. This would be self-defeating to anyone who understands the benefits of reward points. Also, currency transactions are halal, as long as they are spot transactions. Currency exchanges are haram if done with a delivery date in the future.

8. What are the transactions involved when purchasing with a credit card?

I buy a $1000 American Airlines ticket and pay a $15 credit card transaction fee. I use my Chase Sapphire Preferred credit card for the transaction.

In this example, there are three transactions.

• The first exchange is $1000 for a flight.

• The second exchange is me paying $15 to Chase in exchange for a payment delivery, electronic service, rewards points, and benefits.

• The third exchange is paying back my $1015 loan to Chase at a later date.

9. What is the transaction for the credit card annual fee?

You pay $85 for access to the payment network and annual benefits such as no foreign transaction fees, security from fraud in electronic payments, and other things depending on the credit card issuer.

10. How do credit cards make their profits?

Credit cards have two revenue streams. Riba and access to payments network. In the payment network, they charge every transaction at the rate of 2% to 3.5%. That’s 8 times more than countries in Europe.

Credit card companies are an oligopoly. Visa and Mastercard control 70% of the market.

Did you over-simplify the transaction?

In a minor way. To make the explanation easier to understand. This is what happens, step by step.

Every credit card transaction involves five parties. You, your bank, seller, the seller’s bank, and the credit card company.

The actual transaction

This is part of my series on Interest Free Zone: All of the Sahih hadith related to riba, A study of weak hadith on riba, Defining riba, A detailed breakdown on why Islamic mortgages are backdoor riba, Do credit card rewards programs have riba?, Madness on options riba

Related, I have a Riba and Ruin series: Economics is to keep you a dummy, What happened to SVB?, Ward of the State, First Republic: A tale of a fake bank & a fake auction, Hush, hush, a small bank goes poof

Related, I have a Selling Islam series: Salaried Shaykhs, Can paid Shaykhs make mistakes?

References

The Cantillon Effect and Credit Cards: The $257 Billion Payments Mess

Abu Essa. (2019, September 16). Are Cashback Rewards On My Bank Account/Credit & Debit Cards Allowed? [Facebook video]. Almaghrib. https://www.facebook.com/almaghribworld/videos/are-cashback-rewards-on-my-bank-accountcredit-debit-cards-allowed-shaykh-abu-ees/377946566219921/

IslamQA. (2022, June 23). Ruling on discount coupons. https://islamqa.info/en/answers/121759/ruling-on-discount-coupons

IslamQA. (2005, January 6). Ruling on brokerage. https://islamqa.info/en/answers/45726/ruling-on-brokerage

Lambert, T. (2021, January 25). History of Credit Cards. Forbes Advisor. https://www.forbes.com/advisor/credit-cards/history-of-credit-cards/

Mahajjah Institute. (n.d.). Barirah. https://mahajjah.com/barirah/

Steinberg, E. (2019, August 20). Earn Points When You Don’t Pay Your Credit Card Bill. The Points Guy. https://thepointsguy.com/news/earn-points-dont-pay-credit-card-bill/

Tsosie, C. (2016, August 29). What The First Credit Cards Were Like. Forbes. https://www.forbes.com/sites/clairetsosie/2016/08/29/what-the-first-credit-cards-were-like/?sh=69b5cac75ec9

Turner, M. A. (2012, August). Alternative Data Credit Card Rewards: Context, History, and Value. Policy & Economic Research Council. https://www.perc.net/wp-content/uploads/2013/12/WP-2-Layout.pdf

Xu, C., & Reppucci, J. (2023, March 4). The Dirty Little Secret of Credit Card Rewards Programs. The New York Times. https://www.nytimes.com/2023/03/04/opinion/credit-card-rewards-points-poor-interchange-fees.html