Wednesday, July 30, 2008

Debit Usage Will Continue to Soar as Americans Ditch Credit Cards

Survey Finds 40 Percent Using Their Credit Cards Less

STRATFORD, Connecticut (CNN) -- When Cappie and Don Perras saw their stock market investments tank this year, they decided to tighten their belts. They drive fuel efficient cars around their Connecticut town and eat at cheaper restaurants if they eat out at all. To avoid impulse buying, they avoid the mall. And for now, at least, they've put away the credit cards.

This marks a big change from their old attitude. 

"I felt secure with my credit cards like, 'Oh well, I always have my credit cards,' " says Cappie Perras, a special education teacher. "Now I feel like, it's almost like there's a big caution sign in front of the credit card, 'Do Not Use, Only In Case of Emergency,' " she adds

The Perrases are examples of a trend building among middle-income and middle-aged consumers to cut back on credit card use, according to a new study by Javelin Strategy & Research, a financial research firm.

Forty percent of consumers surveyed said they're pulling out their credit cards less than they were at the beginning of the year.

Editor's Note:  Translation...Debit Card Growth Will Continue to Soar...

Don Perras, a college professor approaching retirement age, says the family has stopped using cards, except for rare instances like booking hotel rooms on the road. Instead, the couple uses their debit cards.

The aim: to soon be free of credit card debt. "It would be a top priority," Don Perras said.  But with the high cost of living, the Perrases are having trouble making a dent in their $8,000 credit card balance.  "I used to be able to maybe put $600 towards the debt. ... Now it's maybe if I'm lucky, $200," his wife says.  The Perras family has plenty of company...

Americans carry approximately $961.8 billion in revolving debt, according to the Federal Reserve Board.

Delinquency rates on credit cards are at the highest levels since the end of 2002.  Even as consumers cut back on using credit cards, they're finding it harder to pay down their balances, says Javelin President James Van Dyke.  "In some cases they're out of work or perhaps their wages have been cut back, or maybe they had a variable rate which they have to pay more for than ever before," Van Dyke said. When people use their credit cards less, "this changes what goes on in the industry because credit card companies typically make a lot of their money on the fees they charge merchants."   

The reduction in revenue from new purchases, combined with concerns about new delinquencies, pose big worries for the credit card industry, Van Dyke says.  "Credit card companies are running a bit scared right now, and for good reason, because people are having a difficult time paying off their balances; and everyday consumers, they're cutting into their purchases right now -- both luxury goods and even the basic necessities," Van Dyke says.

According to the Javelin study, nearly 70 percent of financial institutions say they have cut back on credit card solicitations. Six of 10 say they are limiting the amount of credit offered to customers

Here's more from Glenbrook's Payments News

Javelin Strategy and Research has released a report on credit cards and consumer spending finding that Americans are cutting back on credit card use and having difficulty paying off balances. Javelin found "conservative spending behaviors as a result of the economic downturn and the ramifications of the mortgage crisis, soaring fuel costs and rising food prices."

“The sharp decline in credit card spending challenges the popular belief that more Americans are charging basic goods in order to sustain their quality of life,” said Jim Van Dyke, president of Javelin Strategy & Research. “Consumers are making deliberate cutbacks like shopping at superstores, eating out less and watching what they charge. We believe this is because most people have already been impacted by the downturn or they’re anticipating that we haven’t seen the worst of it. It’s very cautious behavior.”

Javelin analysts also found significant cutbacks among credit card issuers. Seven out of ten issuers have reduced efforts to solicit new customers and 62% have cut back the lines of credit they make available to consumers.

“From declining consumer use, rising risk levels, and possible new merchant fee legislation, the credit card industry is taking several hits right now, which could have unintended consequences on Americans,” said Bruce Cundiff, director of payments research and consulting at Javelin Strategy & Research. “If the economy continues to decline, consumers will likely be forced to turn to credit, but find it unavailable when they need it most.”
The report also highlights increasing “pressure” on middle-income ($25-49K) and consumers ages 35 to 64. A high proportion of these groups are less able to save money and pay off credit card balances, and are putting fewer purchases on credit. Javelin also found the greatest decline in luxury goods spending among middle-income and middle-aged consumers. Cundiff continued, “The middle-aged consumer is most adversely affected by the economic downturn in a number of ways and it is this group of consumers that needs the most assistance from financial institutions.

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