But many are just using debit cards now
WASHINGTON — The recession has cooled the American ardor for living on credit. After years of saying "Charge it," consumers are more often paying with their debit cards instead.
Worry about jobs, fear of fluctuating interest rates on credit cards and wariness about spending too much are contributing to the change.
"People are managing their money in a different way," said David Robertson, publisher of the Nilson Report, which tracks the credit-card industry.
"You clearly have a situation where those people who have jobs are exhibiting recession anxiety and they are making more debit transactions."
Nine months ago, Alyson Chadwick, who works for a nonprofit on Capitol Hill, got a debit card with a MasterCard logo so she could use it anywhere for purchases. Carrying cash was unsafe, she thought, and a debit card would help her manage her spending better.
"I use my credit cards hardly at all," she said. "I don't even carry them with me."
Trish Preston, head of U.S. debit for MasterCard, said the changing fortunes of debit and credit tell the story of how the recession has transformed consumer spending.
"Think about what's happening in the economy," she said. "Appliances, furniture, jewelry: Those are very sensitive to the economy, and those have generally been credit-spending categories."
Debit cards, meanwhile, tend to be used for routine necessities such as groceries and gasoline. "Those kinds of expenditures are happening," she said.
The Federal Reserve said that revolving credit, primarily credit cards, dropped by $6.1 billion in July, or 8.1 percent on an annualized basis. Debit card-usage, which has been steadily growing over the years, has surged in this recession.
Credit cards draw on money borrowed at often high interest rates; debit cards withdraw money from the cardholder's bank account.
Visa announced this spring that spending on Visa debit cards in the United States surpassed credit for the first time in the company's history. In 2008, debit payment volume was $206 billion, compared with credit volume of $203 billion. MasterCard reported that for the first six months of this year, the volume of purchases on its debit cards increased 4.1 percent, to $160 billion, in the United States. Spending on credit and charge cards sank 14.8 percent, to $233 billion.
"Consumers are rational thinking individuals, and they're going to shift their behavior in a way that fits with their current economic situation," said Scott Strumello, an associate with the Auriemma Consulting Group, a Long Island-based payment card advisory firm. "They're thinking more seriously about it, and many may decide, 'I'm going to use debit where I can and reserve credit for larger purchases.' "
For three decades, credit cards, which emerged about 50 years ago but were not in widespread use until the 1970s, have reigned as the preferred mode of payment, mostly on big purchases, for baby boomers and their children. Before that, people used cash, bank loans or the installment plan.
Baby boomers typically charged responsibly. Their children, who grew up in the mostly prosperous 1980s and 1990s, became dependent on cards early on, partly because card issuers marketed heavily on college campuses. Unlike their parents, they tended to see credit cards as long-term loans. And they charged too much.
"An awful lot of kids grew up in a very big house and they grew up with pretty much everything they wanted, and then they became adults and their parents, rightly or wrongly, probably wrongly, conditioned them to a set of conditions they cannot afford," said Lewis Mandell, professor of finance and business economics at the University of Washington and a senior fellow at the Aspen Institute.
Industry executives said much of the debit-card growth is fueled by a growing disdain for carrying cash and writing checks. But they also acknowledged that credit cards have fallen out of favor with consumers who want to save more and limit their discretionary spending. In July, the personal savings rate reached 4.2 percent, up from about 1 percent of after-tax income early last year, according to government data.
"The real question is: Is consumer behavior permanent?" Strumello said. "And that's something where the jury is still out. Consumers have made moves in other downturns."
Mandell said the next generation might reject credit after seeing their parents struggle with money: "I think the next generation may be self-correcting depending on the duration and magnitude of the downturn."
There is some indication that the shift to debit is partly a visceral reaction to credit-card industry practices in the past few months. Since a law was passed in May that will limit the industry's ability to raise rates and fees, many issuers have cut credit lines and increased rates, forcing borrowers to look for other modes of payment.
"Part of this is kind of consumer backlash against the industry due to its practices," said Curtis Arnold, founder of the consumer Web site CardRatings.com.
Debit cards have their own drawbacks. Many banks automatically enroll customers in programs allowing them to spend more than they have in their accounts, for a fee. Such overdraft fees, which average $35, have come under scrutiny recently. Congress is considering legislation that would require banks to get customers' permission before approving transactions that would send their accounts into the negative. Many large banks, including Bank of America and J.P. Morgan Chase, announced recently that they would voluntarily make those changes.
TowerGroup, a research firm for the financial services industry, predicts that debit-card use will increase through 2015. The firm found that in less than 15 years, debit card transactions in the United States grew from 1 percent of non-cash transactions to more than 50 percent.
Larry Jones, for example, wants nothing to do with credit cards once he pays off his $2,500 bill. After losing lost his public relations job, he moved in with his brother in Baltimore. With no steady income, he has stopped using credit — "You're spending money you don't technically have," he said — and switched to his Chase debit card.
"This works better for me," he said. "It gives me peace of mind to use my debit card. You take the heat up front."