Plum Crazy

Although this won't do his credit card business any good, I have to have a little respect for Barclays chief executive Matt Barrett for speaking the truth.

Mr Barrett conceded that credit cards were an expensive way of borrowing and they were not recommended for what he called chronic borrowing. He then went on to declare: "I don't borrow on credit card because it is too expensive." He added that he had given his children some advice: "Don't get too much debt on a credit card."

He's absolutely right. Credit cards, with their high rates of interest, are no way to fund long-term debt. Let's suppose you have $5,000 on your credit card and are paying Barclays their 18% interest per year compounded monthly. If you pay the Barclays' minimum balance of 3% per month, it will take you 226 months to pay off your credit card, and you will have paid $4,799.06 in interest. If you could get a home equity loan at a rate of 7% (the prevailing rate in the UK) and used the same payment schedule, it would take you only 148 months to pay off the balance, and you would have only paid $1,164.83 in interest.

Suppose you don't own your home, so you go to a bank and get a 5 year loan for $5,000 with an interest rate of 8%. Your monthly payment would be $101.38, although it wouldn't decline each month as a credit card monthly minimum would. You would then pay off the loan during the 60 month time period, having paid only $913.17 in interest. If you wanted to pay a constant $101.38 each month to Barclays at the 18% interest rate, it would take you 91 months to pay off the same principal, and you would have paid $4,167.25 in interest. Maintaining long-term debt on your credit card simply doesn't make financial sense. You should keep your long-term balance as low as possible.

The reason I have only a little respect for Mr. Barrett is that his company encourages people to do precisely what he advises against, and despite the fact that UK interest rates have fallen 2/3 since 1992 to 3.5%, Barclays' credit card rate has dropped less than 1/3. Caveat emptor, but I don't have to have tremendous respect for Barclays or Mr. Barrett. Just because you can do something, doesn't mean you should.