Americans now use debit cards more than credit cards to avoid debt

NEW YORK — Americans are shunning their credit cards and using debit to avoid incurring more debt, said Javelin Strategy & Research.

Total payment volume for debit cards surpassed credit-card volume for the first time in 2009 and will continue to eclipse it in 2010, according to a report released Wednesday by the Pleasanton, Calif.-based market-research firm that specializes in financial services.

At Visa, the world's biggest payments network, the total payment volume for debit cards increased by 7.9 percent in 2009 to $883 billion as credit-card volume declined by 7.3 percent to $764 billion. Volume for debit cards at No. 2 MasterCard rose by 5.8 percent and 2.8 percent at No. 4 Discover Financial Services.

"Consumers are turning from one form of plastic to another," said James Van Dyke, president and founder of Javelin. "Credit cards are falling out of favor as cardholders become more cautious and look for more conservative payment methods."

Fifty-six percent of consumers said they had used a credit card in the past month compared with 87 percent who said they had in 2007, according to the study, which surveyed 3,294 people in November 2009 for that question. Other findings were based on data collected online from 5,211 respondents in March 2010 and 5,000 consumers in November 2009. If the rate of decline continues, 45 percent of consumers will reach for a credit card in 2010, the study said.

Consumers are spending moderately and focusing on paying down debt, resulting in decreased credit-card use, Van Dyke said. Consumer spending rose 0.4 percent in July. At the Kansas City Federal Reserve's annual monetary policy symposium in Jackson Hole, Wyo., Fed Chairman Ben Bernanke said "consumer spending may continue to grow relatively slowly in the near term."

Revolving debt, which includes credit cards, declined $4.5 billion in June to $826.5 billion, the lowest level since 2005, the Fed said on Aug. 6.

Write-offs for loans deemed uncollectable dropped to 9.3 percent in July from 10.28 percent in June, according to Moody's Investors Service, the first time the rate fell below 10 percent since April 2009. Overdue loans, a signal of future write-offs, declined to 4.93 percent from 5.08 percent. Delinquencies of 30 days to 59 days, the earliest gauge of potential losses, fell to 1.22 percent from 1.25 percent.

Another cause for reduced credit-card use is financial reform aimed at protecting consumers, which has decreased the number of new cards given and cut available spending limits, the Javelin report said.

Federal legislation that limits overdraft fees, caps on fees banks charge merchants for debit-card transactions and credit-card legislation mean banks have to recoup losses and are only giving cards to the most creditworthy borrowers, the study said.

Younger people also favor debit over credit because of the immediate nature of making a payment, which means the shift to debit will be long term, said Van Dyke. And since younger cardholders favor the convenience of debit cards, they won't turn to cash or checks, he said.

Purchase transactions generated by credit and debit cards totaled more than 27 billion from Jan. 1 through June 30, according to the Nilson Report, an industry newsletter in Carpinteria, Calif. Debit-card purchases accounted for 65 percent of all sales, up from 62.3 percent, the Nilson Report said.

Prepaid and gift cards will also become more popular as regulations lead to the end of free checking, increased fees and restructured rewards, said the Javelin report. Card issuers will market these cards to consumers who don't have bank accounts, as well as college students whose parents will buy cards with spending limits, Van Dyke said. The use of prepaid cards is projected to increase to 9.3 percent of total online retail purchase volume in 2014 from 5.8 percent in 2009, the report said.