The Shift: Americans Pick Debit Over Credit

Credit spending is on the decline as ‘cautious consumers’ prefer to pay now as opposed to pay later, according to a new study released Wednesday.

Data obtained by Javelin Strategy & Research shows that credit card use in 2009 was at an all-time low since of 56%, down from 87% in 2007. Javelin first started polling data eight years ago. Additionally, last year, for the first time ever, the total payment volume for Visa (Stock Quote: V) debit cards surpassed that of credit cards, a trend that the financial industry research group expects to continue throughout 2010. According to Javelin, if this trend is allowed to continue unabated, credit card use will fall to 45% in 2010.

James Van Dyke, president of Javelin, attributes the decreased dependence on credit to the recession, with soaring unemployment rates and a decreased ability to pay off credit card debt making consumers reluctant to purchases items with money they don’t have.

“People did not turn to credit as a life preserver following the recession,” Van Dyke explained. “Instead, the average consumer started cutting back on their credit card usage.”

Unfortunately for credit card issuers, consumers able to spend didn’t use their plastic to do so. In lieu of maxing out their credit cards, consumers switched to other payments options like cash, checks (though check use is also on the decline overall) and, most notably, debit cards. Credit-card total payment volume at all four major card brands decreased last year, at rates between 7% and 17% while total debit card payment, increased 3%-7% depending on the card brand.  

However, Javelin also found that many consumers are increasingly using less traditional forms of payment, such as reloadable prepaid debit and gift cards, which enable users to put a specified amount of money on a plastic card that functions essentially like a traditional debit card without a bank account.