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Consumers Are Shifting From Debit Cards to Credit Cards

Christine DiGangi

Consumers have shifted $7.7 billion in spending from prepaid cards and debit cards to credit cards in 2012, according to an analysis of industry data by MasterCard.

Such a change gives insight into the growth of consumer confidence as the nation regroups from the financial crisis. In a paper published this month, MasterCard highlights a trend toward debit card use during the Great Recession and early years of the recovery: From 2008 to 2012, $141 billion in net spending shifted from credit cards to debit cards, and most of that occurred from 2008 to 2009.

“In those early years of the crisis, consumers shifted significant amounts of spending from credit cards to debit cards and reduced credit card borrowing, likely as a response to financial uncertainty,” the paper says.

The difference in growth over that 4-year period is stark: Debit card spending grew 44% and credit card spending grew 14%. More recently, the upward trend in spending has continued, but with a difference.

Debit and prepaid card volume increased by $129 billion (7%) in 2012, while credit card volume grew $172 billion (8.4%). In that time, spending grew $137 billion and consumer confidence jumped 15.4%. The momentum slid away from debit cards and back to credit.

“The shifts from credit cards to debit cards and back are evidence that American consumers are not replacing one payment tool for another, but responding to their individual situations with the best tools they have — borrowing when prudent, paying in full when appropriate, reducing levels of debt when able,” the paper says.

Even as credit card volumes grew, delinquency rates fell. At the end of 2012, 2.7% of credit card accounts were delinquent, down from 6.3% in 2009.

Responsible Spending

In its analysis, MasterCard looked at the positive change in consumers’ attitudes and spending, but noted the caution with which people have rebounded from the financial crisis.

“In order to support consumers who are looking to move through an improving, but not always uniformly positive, economic landscape, financial services institutions must continue to position themselves as a partner,” the paper says. “Continuing to offer attractive rewards products for consumers seeking value and better financial management tools for consumers seeking help will be crucial to smoothing out the occasional bumps in the future’s fiscal road.”

The shift to more credit card spending can be a double-edged sword. Using a credit card can help you build credit if you use it responsibly, whereas debit cards will not help you build credit because credit reports and scores do not factor them in. So as consumers use more credit, and use it responsibly, they stand to build stronger credit in the long run. If you’re using your credit card more often, remember that it’s ideal to keep a balance you can pay in full each month, or if you do carry a balance, to try to keep it around 10% of your available credit. By monitoring your credit scores (one free source, Credit.com’s Credit Report Card, gives you your credit score and an overview of your credit profile), you can ensure that your spending habits are in line with building good credit.

Choosing the right credit card with the most useful rewards can seem like a daunting task, and it’s important to understand the terms and rewards that come with each card. The most important thing is to make sure the card matches the consumer’s needs — getting the great perks comes after.

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