Here’s what you hear on the TV and advertising all the time.

Spend on credit cards and your credit score will improve, you will get more miles that you can use for vacation, the more  you spend on your credit card the bigger discounts you get (the more you spend – the more you save), or the classic ‘some things in life are priceless, for everything else there is_____.’

So for everything that has a price we swiftly take out our card and swipe it.

Here’s the question though, if you are buying a credit card, buying on a credit card, someone is selling the card as well. The company or person selling the credit card must not be doing it out of the goodness of his heart – esp. if it is a company. The company is there to make a profit.

And how does the company make a profit?

By charging you interest on your purchases. Typically 16% to 25% annual percentage rate (APR). This means that anything that you buy today for $100 will actually cost you $125 at the end of the year. I know, I know – you always pay the full balance. So far. The company gives you more credit than you make in a month, but you are a smart consumer so you spend less than you make on your credit card being sure not to exceed your monthly income. So far. The company also promotes gift schemes and points for spending on your card, telling you the more you spend the better rewards you win. This is the only reason you spend on your card – to earn the points. So far.

Think about it for a minute – if everyone pays the complete balance on their credit card, how does the company make money? So logically a percentage of people must not be paying their credit card bills entirely for the credit card company to make any money. This is what determines the high percentage rate on the credit card itself.

The credit card company is giving you the credit because they understand math and probabilities. That’s why they let you keep paying the whole amount of your credit card each month. Because so long as you are spending on your credit card; so long as your credit limit is higher than your monthly earning (which it will always be); so long as you keep collecting points on your card – the credit card company will make a profit.

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Because someone will not pay all that they spend on their card; or an emergency purchase will occur on their card; or they will unknowingly exceed their monthly earning and use some of that extra credit. Eventually.

A credit card is a credit for the company – they get the credit for selling you all of this. You buy the debt because you have yet to pay for it from your own money; money that you have yet to earn, yet to receive.