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Credit card debt from holiday gift shopping may not be as explosive this year

Carlina Green has two credit cards, but she isn't touching either of them this holiday season.

As she makes purchases in stores and online she's relying on her debit card instead.

"I like spending within my means," says Green, 24,  who provides legal advice to low-income clients at a nonprofit law firm in San Francisco. "It doesn't completely mean I'll stay within my budget, of course, but at least I'm spending money that I do have."

If she were to make holiday and year-round purchases with a credit card, she fears that wouldn't be true.

Green is among a larger-than-normal group of Americans who are trying to avoid going into debt from making too many credit-card purchases this holiday season. More shoppers indicated they plan to pay with debit rather than credit cards, according to multiple surveys conducted ahead of Black Friday.

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Carlina Green is making holiday purchases with her debit card to avoid spending out of her means
Carlina Green is making holiday purchases with her debit card to avoid spending out of her means

A survey by the National Retail Federation of over 7,000 shoppers found that 43% of shoppers plan to primarily use debit cards to make holiday purchases, the largest share since 2013. Meanwhile, 38% of respondents said they'll primarily use credit cards, the smallest share since 2015. The remaining shoppers planned to make purchases using cash or by writing checks.

A TD Bank survey of over 1,000 Americans' holiday shopping habits suggested that the gap between people primarily making purchases with debit cards over credit cards could be even wider. Forty-two percent of respondents said they planned to use debit cards and 33% credit cards.

So far, that's not showing up in Bank of America's spending data for November, which doesn't separate out holiday-related spending from all the spending that occurred. While consumers earning less than $50,000 a year primarily used debit cards last month, there isn't a significant difference in usage rates compared to the last two years, according to a Bank of America Institute report published Thursday. And consumers earning more than that primarily paid for goods and services with credit cards.

The report draws from Bank of America customer household spending data.

Holiday cheer comes with holiday debt

When you pay with a debit card you cannot exceed what's in the bank account linked to your card. But with a credit card you can, it'll just end up costing you more in interest and fees if you don't have the funds to pay your bill on time.

LendingTree chief credit analyst Matt Schulz suspects that a lot of people who aren't paying with credit cards "don't trust themselves not to overspend" and are trying to avoid piling on more debt. They're likely already struggling with inflation and "the last thing they want to do is put more money on the credit card and dig their hole deeper," he said.

Terri Ross, left, checks out a customer at JCPenney as shoppers flock to the Huntington Mall for Black Friday deals on Friday, Nov. 25, 2022, in Barboursville, W.Va. (Sholten Singer/The Herald-Dispatch via AP) ORG XMIT: WVHUN204
Terri Ross, left, checks out a customer at JCPenney as shoppers flock to the Huntington Mall for Black Friday deals on Friday, Nov. 25, 2022, in Barboursville, W.Va. (Sholten Singer/The Herald-Dispatch via AP) ORG XMIT: WVHUN204

The holidays are notoriously linked with rising debt levels as people succumb to the pressure of buying the perfect gifts and planning memorable family vacations. Last year more than one-third of Americans incurred debt from holiday shopping averaging nearly $1,250, according to a survey conducted by LendingTree. The majority of the debt people took on stemmed from credit cards.

It took Jalea Rodriguez months to pay off nearly $600 in credit card debt she incurred from holiday shopping last year.

"I was just swiping and swiping until I overspent by a lot," said Rodriguez, 23, a pharmacy assistant in Harlem, New York.

This year she's mainly using a debit card to help her avoid last year's mistakes. "If I don't have the money I'll just find a different gift."

The expected increase use of debit cards could also be taken "as a sign of confidence and stability," that people have enough money to cover holiday purchases, said LendingTree's Schulz.

And for consumers paying with credit cards, utilization rates, the share of available credit a consumer uses, haven't significantly increased from prior years, according to the Bank of America Institute report.

That signifies that "people are being cautious and responsible," said David Tinsley, senior economist at the Bank of America Institute and an author of the report. That's not stemming from leaning more on debit cards over credit cards, he said, but rather from "slowing their overall spending."

The report shows that spending growth in November was only up 0.2% year-over-year. Taking inflation into account, spending growth is likely down from prior years, Tinsley said.

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People are still tapping into pandemic savings 

Flush with stimulus money during the pandemic, Americans paid off much of their credit card debt and built up savings. As a result, credit card balances, the money consumers owe to credit card companies, dropped by $120 billion to $770 billion from the first quarter of 2020 to the first quarter of 2021, according to data from the Federal Reserve Bank of New York.

But in the most recent quarter, credit card balances shot up to $930 billion, a 15% increase from a year earlier and the largest increase in 20 years. Personal savings rates, the share of post-tax income saved, dropped to 2.3% in October, according to the Bureau of Economic Analysis. A year ago it hovered above 7% and two years prior it was double that.

The drop in savings and rise in credit card balances came as consumers confronted the highest price increases in nearly 40 years. As the Federal Reserve continues to raise interest rates to tame inflation, paying off credit card debt will become increasingly expensive.

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Nevertheless, Americans had $1.7 trillion worth of pandemic stimulus money saved two months ago, according to the Fed. That's nearly 75% of the cumulative $2.3 trillion in savings households accumulated in 2020 through the summer of 2021 as a result of government stimulus programs.

People paying with debit cards are likely tapping into those savings, said Kent Belasco, director of the commercial banking program at Marquette University where he teaches finance. "They're holding their credit card as a fallback for the future maybe knowing that we're heading into more difficult times."

But by that point, it'll be even more expensive to lean on credit cards and other forms of financing as the Federal Reserve continues to raise interest rates.

That could explain why people are being more cautious about taking on debt now, said Belasco, who was the chief information and operations officer for First Midwest Bank.

As for Green, the law firm employee, said mainly uses her credit cards on small-ticket items to help build her credit history, she said, and as a backup payment method in case fraudulent charges are made on her debit card and she can't use it until a replacement card arrives.

Elisabeth Buchwald is a personal finance and markets correspondent for USA TODAY. You can follow her on Twitter @BuchElisabeth and sign up for our Daily Money newsletter here

This article originally appeared on USA TODAY: Holiday shoppers look to debit cards this year over credit card points