Question

A friend of mine wishes to do a balance transfer from his current 0% interest rate credit card to another 0% interest rate credit card; however the new credit card provider will charge a 3% balance transfer fee. Is payment of this balance transfer fee halal or haram?

Answer

With a balance transfer, the new creditor pays off the initial creditor and is now the one owed the outstanding debt. It is as though the customer has now borrowed money from the new creditor as opposed to the first. As this is a loan related matter, there will be certain rules to ensure that an interest based transaction does not take place. One of the rules is that the creditor can not take any  benefit from the debtor beyond the principle debt. Hence, late payment charges etc. will not be permitted.

The question then arises as to whether or not the second creditor can charge a balance transfer as this is also a type of benefit. Generally, contemporary jurists have permitted institutions to charge a service charge as long as the charge is reasonable and reflects the cost of the service. If the charge is excessive then it will no longer be considered a service charge, rather, it will be interest though disguised as a service charge. Based on this, the principle of charging a simple transfer fee is permissible.

There is one issue however, and that is the issue of charging a transfer fee according to a percentage, as opposed to a fixed rate. Hence, the more transferred, the higher the charge to the customer. In cases where there is a high charge to the customer, it is possible that the charge no longer accurately reflects the cost of the service, rather would start venturing into profit making hence resulting in interest.

It is for this reason, two opinions can be found amongst contemporary jurists in relation to charging such fees as a percentage. The first opinion is one of caution and disallows such practice closing the door to interest charges. The second opinion permits this type of practice based on the fact that it is up to the institution to determine their cost for the transfer. The institution has a right to stipulate whatever price they would like for the service, provided that there is a mutual agreement between the institution and the customer. In addition to this, it is difficult to say with certainty, that the cost of transfer exceeds the cost of the service as the exact cost of transfer cannot be qualified. It is not just based on the time spent making the transfer, rather, the entire infrastructure which is in place to support the structure would be taken into consideration and putting a price to one particular transfer would not be a simple task.

Based on this, the cautious approach would be to avoid a balance transfer which charges fees as a percentage in this manner. However, if by remaining with the initial credit card company you are for sure going to be hit with interest charges, then in such a case it would be better for you to go for the balance transfer placing your trust in the opinion of those who permit it, as this would be better than involving yourself in interest which is undisputedly unlawful.

Answered by:
Ifta Research Fellow

Checked & Approved by:
Mufti Abdul Rahman Mangera
Mufti Zubair Patel