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Debit Cards Supplanting Credit Cards Among Holiday Shoppers

The Kardashian sisters' ill-fated debit card foray aside, consumers are expected to whip out their debit cards and pre-paid cards at a record pace this holiday season, rather than rely on credit cards. The National Retail Federation (NRF) says debit cards will be the go-to payment system for 43 percent of holiday shoppers; that's up from about one-third who used debit cards for their holiday spending in 2005. At the same time, the NRF survey says less than 30 percent of holiday shoppers intend to put their purchases on credit cards, the lowest level since 2002.
The Creditcardless: A Fast Growing Group
The shift from credit to debit card usage isn't some seasonal aberration. The TransUnion credit bureau announced yesterday that 8 million Americans stopped using bank-issued credit cards this year, on top of the 70 million who were already card-free. Of course, plenty of those card-eschewers had their cards cut up for them as banks have aggressively closed down their riskiest credit card accounts in the wake of the financial crisis. But according to TransUnion, this isn't just about shutting down subprime card accounts: "[C]onsumers with higher incomes were just as likely as consumers with lower incomes to suspend their use of this payment option." TransUnion VP Ezra Becker added that the expanding ranks of the credit cardless is "one of the fastest growing consumer segments."

Indeed, in yet another survey, Javelin Research says credit card usage is at an all-time low, with the number of people using them falling from 87 percent of consumers in 2007 to 56 percent in 2009. And once the year-end 2010 data rolls in, Javelin says we could officially become a debit and prepaid card nation as it expects credit card usage to dip below 50 percent.

Spending Differently, Not Less

Now that's not to say we've suddenly gone on some self-induced austerity program. The early returns on holiday shopping are that Black Friday spending was up slightly, while Cyber Monday spending jumped 15 percent compared to last year. All that's happened is that we've shifted how we pay for all our purchases. In addition to the sharp rise in debit-card usage, about 25 percent of Americans say they intend to use good old cold, hard cash for their purchases; that means that about 70 percent of holiday shopping will not be put on a classic credit card. And in a recent survey by the National Foundation for Credit Counseling, just 9 percent of consumers said they expect to run up a credit card balance for holiday purchases that they will not be able to pay off in full come January. That is, 9 percent were willing to admit they will go into holiday credit card debt; something tells me the actual figure could be higher.

A Permanent Cold Shoulder for Credit Cards?

It will be interesting to see if this shift away from credit cards is a long-term, systemic change or just a temporary blip induced by our national belt-tightening and credit consciousness during the depths of the financial crisis. The banks sure seem to be hungry once again for more business. According to Mintel, credit card issuers sent out 1.2 billion new credit card offers in the third quarter of 2010, three times the number of offers made a year ago. And at least so far, the new consumer-friendly credit card regulation that went into effect earlier this year hasn't caused banks to hike their fees, as was expected. Mintel says just 28 percent of new card offers come with annual fees. So it's not as if consumers are dumping credit cards because of cost.

Understanding the New Credit Card Rules

But the new regulation that makes it harder for college students to obtain credit cards could in fact be a factor in the rising popularity of debit and pre-paid cards. Javelin Research specifically called out pre-paid cards as a potential growth area for card issuers in part for the lovely reason that pre-paid cards "escaped financial regulation," and also because of the group's expectation that debit cards will lose some of their allure if banks aggressively amp up their fees and scale back on free checking.

Regardless of which payment option you opt for, vigilance is still the key.

As MoneyWatch blogger Stacey Bradford points out, pre-paid cards can end up being plenty costly. And it's not as if debit cards are a free ride either; be sure to check out MoneyWatch blogger Kathy Kristof's spin through the dangers of debit cards. In addition, if you find yourself tempted by one of the billions of new bank credit card offers that are back in circulation, I'd recommend you rip 'em up if you've already got the credit you need. Or if you're looking for a new card, check out a credit union credit card. They tend to be a lot more consumer friendly.

Photo courtesy of Flickr user Ciaran McGuiggan
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