|Poll: Is Riba Time Value of Money
Total Votes: 3
In credit card transactions, assuming the card holder pays off 100% balance before the due date of the statement, the card holder does not appear to pay interest. But for the merchant, there is always a “fee” charged by the bank for releasing payment. I have two concerns about credit card transactions. To understand the question, let me build the following hypothetical scenario:
Let’s say I pay for $100 purchase using credit card. Let’s say the “fee” is 2% for releasing funds within 3 days.
Jan 1: I owe the shop $100.
Jan 4: Shop receives $98.
Jan 30: I pay my card’s statement, $100.
Implicit is 27% interest. How? Bank is effectively the shop $98 for 27 days.
The other concern is that bank gives incentives to the card holder in the shape of “rewards” that could include cash rewards or other benefits (for which we could take a reasonable market value). Let’s say bank pays card holder 1% cashback every year. Take my $1 reward received on Dec 31st, backward to Jan 30, because that is easier. It comes to $0.78. I am effectively paying $99.22 after the cashback reward on Jan 30. Or, put another way, Bank and I are effectively partners in lending money on interest: Bank’s share 61%; mine: 39%.