This paper investigates debit card usage and its impact on household debts, using the 2004 Survey of Consumer Finances. By conducting simultaneous equation modeling, we examine how debit card users are different from non-users, and whether debit card usage influences household debt. We find that, after controlling for selection bias, the use of debit cards is negatively associated with household debt. We also find that those with revolving debt tendencies (i.e., carrying outstanding balances on credit cards) are more likely to use debit cards than those without a revolving debt tendency. We conclude that debit card usage discourages the accumulation of household debt rather than that debit card users tend to be financially conscientious. © 2007 Academy of Financial Services. All rights reserved.
JEL classifications: D12; D14
Keywords: Credit card; Debit card; Household debts; Payment instrument; Survey of Consumer Finances
In recent years, debit cards have become a popular payment instrument in the United States (Evans & Schmalensee, 1999, p. 306; Weiner, 2000). Since their introduction in 1975, growth of these cards has been slow, particularly throughout the 1980s and mid-1990s. However, in the last decade, the percentage of households that use debit cards has increased dramatically: from 20% in 1995 to 37% in 1998 and to 50% in 2001 (Anguelov, Hilgert & Hogarth, 2004). Debit cards achieved the highest growth rate among forms of retail payment between 1995 and 2000 with an increase of 41.8% (Anguelov et al., 2004). In 2000, debit cards accounted for 11.6% of all retail transactions (Gerdes & Walton, 2002).
For retail transactions, consumers have several choices of payment instruments, including cash, check, credit cards, and debit cards. Each choice provides a host of desired properties that differentiate one instrument from the other. Debit cards, which became feasible and more widely available through the Visa and MasterCard network, provide the point-of-sale convenience of credit cards and yet the direct transaction properties of automatic teller machine (ATM) cards (Weiner, 2000). In addition, consumer protection for this form of payment has been enhanced by the limits now placed on the liability for lost or stolen debit cards. Unlike credit cards, debit cards use funds from the consumer's funded bank account and do not allow consumers to borrow money, a characteristic that can discourage overspending and, thus, discourage debt accumulation. One could argue then that consumers intentionally choose debit cards instead of credit cards in an effort to avoid debt accumulation.
We empirically investigated two research questions in this study: whether debit card users are different from non-users and whether debit card usage discourages the accumulation of household debt. Using the 2004 Survey of Consumer Finances, commissioned by the Federal Reserve Board, we examined (1) what influences the use of debit cards, particularly whether consumer tendency to use revolving credit (i.e., carrying outstanding balances on credit cards) is associated with debit card usage, and (2) whether the use of debit cards is negatively associated with household debt. The research utilized simultaneous equation models.
Despite the growing popularity of debit cards, only limited research has been devoted to debit cards. Particularly, the relationship between the use of debit cards and household debt has never been studied although theories do posit that debit card usage discourages the accumulation of household debt. Empirical investigation of the relationship between debit card usage and household debt can provide important and useful implications for financial counseling agencies and consumer educators in their attempt to help consumers lower their debt levels and practice better household finance management.
2. Existing literature
Debit cards bundle the many desirable properties of different payment tools. …