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Muslim’s Guide to Debt and Money Management Part 3

Posted by ibnabeeomar on January 14th, 2008

(Read the Intro, Part 1, and Part 2 before proceeding)

II. Americans in Debt

A) Average Debt

A quick look at the statistics says 43% of American households spend more than they make. And for every American household with at least one credit card, the average debt is somewhere between $8,000 and $10,000. This is talking about consumer debt. That means, these are the figures without factoring in car payments and mortgages!!

Here’s some stats from Motley Fool:

$1.7 trillion
Total consumer credit.
Credit card debt carried by the average American.
$50 billion
Total finance charges Americans paid in 2001.
$1.6 billion
Market capitalization of AT&T — the entire corporation.
Percent of U.S. households deemed “credit worthy” by the lending industry.
1.3 million
Number of credit card holders declaring bankruptcy last year.

Houston, we have a problem.

Wait, not you right? Alhamdulillah, you are one of those few who has a halal credit card since they pay it off every month? The credit card companies love you.

GE Rewards MasterCard holders who pay off their balances each month are charged an annual $25 penalty fee. Industry analysts predict that more credit card issuers will follow GE’s lead.Why are credit card companies doing this? Because 75% of their revenues come from finance charges, and conscientious users who pay their balances in full each month are in effect using the cards for free. This can be extremely unprofitable for credit card companies.

Some credit card companies are imposing penalties that affect all customers, including:

  • Eliminating the 30-day interest-free grace period following a purchase.

  • Charging an over-limit fee if you exceed your credit limit by as little as $1, even if your purchase has been approved over the phone by the store.

  • Imposing a late fee of up to $20 if you miss your monthly payment date by one to three days.

  • Increasing your finance charge if you don’t pay on time twice in one year. Some punitive finance rates range from 24.9% to as high as 32.6%.

According to a BusinessWeek report, total household debt, including car loans, mortgage, and student loans, topped 100% of disposable annual income recently for the first time ever [from Motley Fool].

All this with no hope of paying it off. Consider this: If you have a balance of $4,500, paying the minimum payments would take approximately 40 years to pay off!!

Check out this payment chart from Motley Fool: 

Starting Balance
Interest Rate
Time to Pay off
Total Interest Paid
30 years
20 years, 1 month
18 years, 2 months
16 years, 1 month
* Calculations made by making minimum monthly payments or 2.5% of the balance.

This, is the price, of our consumer culture.

B) Bankruptcy

Bankruptcy statistics are readily available online (go here for a quick recap). Personal bankruptcies exceeded 2 million cases in 2005 [That’s roughly the entire population of a city like Houston]. Some have put the estimate around 1 out of every 53 households! That’s a whole lot of people strapped for cash!

Yasir Qadhi made a memorable quote at this past Texas Dawah Conference:

100% of divorces began as marriages.

And I can say that I am fairly positive that most people filing bankruptcy as a result of consumer debt started out thinking they were going to pay everything off on time and never reach that stage.

The reason we have to discuss bankruptcy here is because when people have finally hit the wall with their finances and don’t know where to turn, they file for bankruptcy to get relief from their debts. In a worldly sense, you have killed your credit rating and have now been ‘branded’ as having filed for it. It will be difficult now to even get things like basic utilities without first putting down cash deposits on them due to your low credit score.

For some people it seems like their only option at starting over. In any case, if you are considering it, then please do 2 things. 1) Consult an imam about the shari’ah perspective on the debts being discharged, and 2) consult a bankruptcy attorney to see if it’s the best option, because this really is a last resort type of thing, though people have rebounded from them. I tried to get an answer to #1, but I was told it’s “complicated” :). I was able to find a fatwa on AMJA regarding, however, it is not detailed.

Dave Ramsey compares bankruptcy to divorce. It is one of the top negative life changing experiences a person can go through (like divorce, disability, and death of a loved one). Most job applications even ask if you have ever previously filed for bankruptcy.

One interesting thing to note about bankruptcies though, is that the leading cause of them is medical bills! Oh, and this includes people with insurance. [Go watch Sicko for more on that one.] While this is obviously a complicated issue that stems from the shortcomings of our healthcare system, one of the issues that compounds it is the fact that most Americans simply do not have money saved for emergencies, and the primary reason for this is not being in control of their finances.

C) Who Benefits from this Debt?

Credit card companies, banks, and lenders in general. They benefit from keeping you tied down to monthly payments. In the
Maxed Out documentary, a bankruptcy expert met with executives telling them how they could limit giving credit to people that might be prone to bankruptcy, and how this could help both sides. They simply looked at her and said, it is precisely from those people that they make their profit margins!

This is not surprising when one realizes that truly wealthy people don’t use credit cards or debts to attain what they need!

One article I came across had this quote,

There’s far too much predatory lending going on these days. By and large, banks aren’t really interested in helping their customers, they’re simply interested in bilking them out of a few more dollars each month. That’s why American workers are dubbed “wage slaves” by the people in the know. It’s the illusion of financial freedom in a system that keeps siphoning your hard earned cash, day after day, year after year, until the day you die. And then you get to pay for that, too.

This is really something that does need a lot of research. The people who profit from keeping us in this cycle are the banks and credit card companies. Plain and simple. The more that people continue making monthly payments in interest and fees, the more they make for not doing anything.

Finally, I leave you with an article entitled, I Want the Earth, Plus 5% - A history of money, that is a must read!

Now that this stuff is out of the way, the upcoming posts will start getting into the juicy stuff. In the next post insha’Allah we will look at some common money myths that are perpetuated, and jump headfirst into credit cards.

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