Credit Cards? Nah! Americans Moving to Cash, Debit Cards

Article excerpt

Credit cards are losing their luster as a method of payment, especially among young adults.

Adam Baker shed no tears when he and his wife closed the last of their three credit-card accounts in 2008. "It was a really cool experience," says the Shelbyville, Ind., resident. "We don't need credit cards. And a 2 percent cash back reward" for using one "is not enough enticement."

Californian Josh McElravy stopped using credit cards early this year, using an online person-to-person loan to slash credit-card debt that peaked at nearly $10,000. "A debit card provides the convenience of plastic without worrying about banks charging you 20 percent interest" on unpaid balances, says Mr. McElravy, an electronic money transfers specialist at a bank in Santa Clara, Calif. This season, he can consider shopping for holiday gifts.

The credit card - that familiar 3-1/4-by-2-1/8 inches of plastic purchasing punch - is not exactly headed for history's trash bin. But it is losing its sheen as Americans' preferred method of payment. Since 2005, consumers have used debit cards more often than credit cards, says The Nilson Report, a payment-systems newsletter in Carpinteria, Calif. By 2016, it forecasts, they'll spend more on debit cards, too.

Why the switch? One big reason is that hard economic times and tight lending conditions have forced card issuers to pare risky accounts and consumers to trim card balances. The shift is especially evident among young adults, many of whom seem to prefer a pay-as-you-go approach. But such a move could hurt retailers, even as reforms could spawn new card fees.

New fees coming?

For example, depending on the debit-card rules that the Federal Reserve adopts, consumers could have to pay - or pay more - for checking accounts tied to debit cards and "get fewer benefits associated with debit-card use," says Shawn Miles, head of global public policy at MasterCard Worldwide, based in Purchase, N.Y.

Since the recession, consumers have been paring credit-card use. In September, the level of revolving debt (mostly from credit cards) was down nearly 18 percent compared with December 2008, Fed data show. By the end of September, the number of open credit-card accounts was down 24 percent from its 2008 peak, the Federal Reserve Bank of New York said.

"After the economic trough, we do expect debit cards to remain more popular than credit cards," says Brian Riley, senior research director of bank-card services at TowerGroup, a financial-services research and advisory firm based in Needham, Mass. He expects "the recession's mental effect on people" to linger, since "it will take decades for households to regain the net worth they had in 2007. …