Cash or Credit? More Consumers Turn to Debit Cards

Cash or Credit? The answer may be a debit card.

Credit card and cash
Credit card and cash

Wary of the economy, shoppers are increasingly shying away from credit cards, opting to use cash, checks or debit cards rather than to "pay later" on a credit card.

In fact, use of debit cards surpassed that of credit cards last year, according to a new study released by Javelin Strategy & Research.

The study found that in 2009, only 56 percent of consumers surveyed during a particular month had used a credit card, down sharply from 87 percent in in 2007.

What's more, if this trend persists, credit card usage in 2010 could fall to 45 percent, the market research firm said.

"People are extremely wary," said James Van Dyke, president and founder of Javelin. "They can't tell which way the economic winds are blowing. They are just incredibly uncertain."

Van Dyke sees this as "a sea change" in consumer behavior.

Javelin suspects debit card usage will continue to grow in the years to come. Based on Javelin's research, the total purchase value for debit cards rose between 3 percent and 7 percent depending on the card brand from 2007 to 2009.

Consumers in their twenties helping to drive the trend as they are more likely to use a debit card than other forms of payment, Van Dyke said. One reason is that some consider it a better way to budget their money.

"Credit cards don't make sense for many young people," Van Dyke said.

Then, there are lower-income consumers, some of whom are being paid their salaries on reloadable prepaid cards rather than by getting a paycheck deposited into an account, Van Dyke said.

One danger here is that reloadable prepaid cards is a payment category that remains largely unregulated under the new credit card laws.

That's more bad news for the nation's biggest credit card issuers. These companies are already seeing a less profitable future as consumers spend less and pay off their credit card bills. And, raising interest rates and imposing new types of fees isn't likely to fill the gap.

Instead, credit card issuers will need to come up with new types of products to encourage card-spending.

MasterCard , for example, announced last month that it plans to offer its Citi cardholders a new card that allows users to set spending controls and receive real-time spending alerts aimed at helping them avoid overspending. The program, dubbed inControl, also will allow customers to determine where, when, how and for what types of purchase their cards may be used.

This type of product goes right to the heart of why some cardholders are refraining from using their credit cards—they want to be in control of their spending.

Roughly 16,000 companies in the U.S. issue credit cards, but the six largest lenders are Citigroup, JP Morgan Chase , Bank of America, Capital One Financial , American Express and Discover Financial Services.

Credit-card loan balancesat these six lenders have dropped 20 percent since their peak in the second quarter of 2008, to $544 billion, according to Credit Suisse.

The decline reflects not only moves by consumers to pare back debt, but also bank efforts to weed out risky borrowers.

Another look at consumer credit will be issued later Wednesday by the Federal Reserve.

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