How does an Islamic credit card work?

With both conventional and Islamic credit cards available in the UAE and Saudi Arabia, some customers struggle to understand the difference between the two. So, here’s a guide on how Islamic credit cards work.

This is one of a series of six guides to Islamic products: Islamic Banking – how does it work? | Islamic bank accounts explained | Islamic credit cards explained | Islamic personal finance explained |  Islamic car finance explained | Islamic home finance explained. We also have a guide to Islamic finance for SMEs.

Why are Islamic credit cards needed?

When a consumer takes out a conventional credit card, they pay interest on the amount spent along with any service fees. But this concept is unworkable for Muslims as avoiding interest, or riba, is one of the main principles of Islamic Banking.

Therefore an Islamic card allows Muslims to spend on items with a card that conforms to Sharia principles by avoiding any forbidden, or haram, financial practices.

In doing so, it still manages to retain the convenience associated with a conventional banking card while also ensuring no religious or ethical beliefs are compromised.

How does that work then?

No interest is charged on a card’s outstanding balance. Instead the card works by the principle of Ujrah, or service charge, meaning that rather than interest a small fee is charged. This is generally an annual fee that is either charged once a year or spread across the year through monthly installments.

However, customers who do not pay off their outstanding balance may be charged a fee for not clearing the card.

Other Islamic banks, however, may choose to levy a profit rate on outstanding balances with preferential rates awarded to customers whose salary transfers into the bank. Unlike conventional banking, the profit rate levied is non-compounding.

What other differences are there?

As well as no interest, un-Islamic charges like late payment fees are not always applied. However, some Islamic banks refer to them as late payment compensation fees.  Foreign exchange fees still exist if you spend on your card overseas and cash withdrawal fees can also apply.

Can a non-Muslim sign up for an Islamic credit card?

Of course. Islamic credit cards are available to anyone over 18, regardless of their religion, as long as they meet the bank’s application requirements.

What happens if I do go over my credit limit?

As mentioned above, you may not be charged, however, like any card, the bank may lower your credit limit. Also, if the customer continues to abuse the card, the bank may deactivate the card until the outstanding balance is paid off or the customer agrees to more responsible spending habits.

So, how do I find the best Islamic credit card?

When you take on any new financial product you must always compare all the options in the UAE and Saudi Arabia market. Look closely at the annual fees quoted and the monthly fees on unpaid balances. Also, what benefits come with your credit card?

The rewards on Islamic cards are just as beneficial as those offered by conventional banks. So, if you want to build up air miles, search for an air miles-linked credit card or if you want golfing privileges search for the card that offers the best golfing benefits.

It’s also worth remembering, there are always good introductory deals so look out for any offers too. However, some of the more attractive cards will demand higher minimum salaries.