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Bad economy boosts debit card use

By Claes Bell ·
Thursday, October 21, 2010
Posted: 12 pm ET

If you find yourself more likely to reach for a debit card than a credit card at the register, you're not alone. A new study from BAI Banking Strategies finds the trend of abandoning checks continuing -- only 5 percent are using checks as their preferred method of payment -- but instead of moving to credit cards, consumers are shifting to debit cards.

A new survey finds more consumers are using their debit card over their credit cards

A new survey finds more consumers are using their debit card over their credit card

The study suggests this change is due in part to an increased emphasis on controlling costs among consumers, who may be wary of the budget-busting power of credit cards to quickly spend amounts that could take weeks, months or even years to pay off.

I'd bet the credit contraction of the past few years has also played a role. Many consumers battered by joblessness, foreclosure and other financial calamities don't have the same kind of access to credit they once did.

Whatever the cause, the survey found the number of consumers using credit cards as their preferred method of payment has fallen below 20 percent for only the second time since 1999.

Overall, this seems like a positive development for consumers. I don't think anyone would dispute that consumer debt was running wild at times during the real estate, which has ultimately resulted in a lot of painful but necessary deleveraging. The fact that consumers are adjusting to this new reality by focusing on living within their means is probably a good thing.

One possible negative is a decline in credit card use will further squeeze bank profits, since banks make more money from transaction fees on credit card purchases than from debit card purchases. That squeeze will likely intensify as debit interchange fees are reduced in the near future under the Dodd-Frank Act's Durbin Amendment.

The end result may be higher bank fees going forward for checking account holders as banks try to find ways to be profitable in the facing of a changing regulatory and business environment.

What do you think? Is the news that consumers are abandoning credit for debit a good thing? Or does the prospect of higher banking fees make you wish people would go back to credit cards?

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1 Comment
Mike Westfield
October 25, 2010 at 10:45 am

There will always be competition and some banks will offer low or no fee debit cards to premium customers. Are debit cards the answer? Yes and no. Debit cards force you to have the money up front, but the fees for a slight infraction can quickly shoot into three figures.

There are plenty of horror stories online, especially that banks sequence purchases to maximize penalties. You have know know your balance all the time. Debit cards are not a good idea for people who keep their balances down to the wire.

I am a fan of credit cards, especially the ones that offer purchase protection and cash back advantages. However, My rule of thumb is if you can't pay the credit card in a month or at most three, don't make the the purchase.