Is it Permissible To Opt For A Credit Card With Lower Interest Rates to Pay Off A Credit Card With Higher Interest Rates?

Question:

If a person has a credit card loan with very high interest rates, can they take out an interest bearing loan with a lower interest rate to pay off the credit card loan. The result being that they still have an interest bearing loan outstanding, but would pay less interest?

In the Name of Allah, the Most Gracious, the Most Merciful.

As-salāmu ‘alaykum wa-rahmatullāhi wa-barakātuh.

Answer:

One should initially and earnestly seek a Shariah compliant method such as a gratuitous loan to pay off the credit card debt with high interest.  If one cannot find any Shariah compliant financing to free oneself of a credit card with high interest, then, one should seek financing with 0% APR for the highest number of months possible.  If one cannot acquire any 0% APR offers, then, as a last resort and purely to save oneself from more sin, one may take out a credit card with a lower rate of interest.  Furthermore, one should seek continuous repentance and forgiveness from Allah for engaging in interest bearing transactions.

The Fiqh (jurisprudence of the Answer):

Contemporary scholars are split in their opinions on credit facilities as a result of different cards in the market, different geographical needs, different factors affecting sustainability and development of the community.  Whilst some contemporary scholars are of the opinion credit cards are not permissible at all even if one does not pay interest, other scholars such as Mufti Taqi Uthmani, Mufti Khalid Saifullah and Mufti Radha ul Haq have expressed the permissibility of using a card facility if one is confident of repaying the outstanding balance before any interest accrual[1].

The reasoning behind the above is that a credit card facility with 0% APR and interest accrual only upon default is essentially a loan with an irregular term in the contract.  Irregular terms and clauses are void and nonexecutive in gratuitous contracts.  Thus, the clause is considered to be inactive and dormant unless one fails to pay (A credit card with agreed and defined interest repayment from the outset is a interest (riba) contract and not a loan agreement different in ruling to the former credit card).
The principles of ḍharūrah (necessity) dictate that one should sequentially seek alternative modes of financing.  Only if one cannot find any Shariah compliant financing or 0% APR financing, there is concession to apply for a credit facility with lower interest rates.  Generally, this is not permissible as a credit facility with pre-agreed and guaranteed interest repayment is an interest bearing contract.   However, the concession is premised on Istiḥsān (jurisitic preference) considering that one will end up paying less interest as a result and thus the sin of paying interest will be relatively less.

And Allah Ta’ālā Alone Knows Best

Mufti Faraz Adam,
www.darulfiqh.com
 
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