Consumers began favoring debit cards over credit cards during the recession in 2008, but now that trend is reversing itself and credit cards are back in favor.
Although consumers spent the last couple of years reducing credit card usage, by the second quarter of 2011, they were switching back to credit cards, for several reasons, but essentially returning to pre-recession levels of usage.
One of the main reasons for this reversal is the new cap on debit card interchange fees. Banks are losing a tremendous amount through lower fees. Although some banks have invented other types of “fees” to cover their losses, this has not pleased consumers, who are making the switch back to credit cards.
While this is one reason for the rise in credit card usage, it is only part of the equation.
During the recent recession, nearly eight million Americans couldn’t get credit cards because their credit scores were too low as banks tightened their credit. Banks are relaxing their credit requirements and issuing more cards. These consumers are now being invited to re-apply for credit.
Many who simply cut back on their spending are also easing back into carrying plastic again.
Purchases made with credit cards rose every quarter in 2011, thus setting the stage for a real comeback in credit card usage for 2012. However, consumers remain conservative about how much debt they are willing to carry. While increasing the use of credit cards, they are also paying back the debt each month, causing credit balances as a whole to fall, according to a report from Fitch Ratings.
The result of these conditions are that banks have been actively soliciting new accounts and boosting incentives through sign-on bonuses and other perks to get new cardholders.
Bank credit card mailings surged 85% since the start of 2010 to 1.3 billion offers in the third quarter of 2011, according to an analysis conducted by research firm Mintel Compermedia. Eight out of ten of the solicitations were for cards with rewards programs, such as points, miles, or cash rebates.
Because of the cap on interchange fees, banks did very little to solicit more debit card use. By adding various service fees and other charges to debit card accounts, banks encouraged consumers to switch to credit cards. This strategy appears successful, at least with online users.
Javelin Strategy and Research projected that “online credit card use will surge 63% for 2011 to 2016, compared to a 2% increase in debit card use.”
When surveyed, two thirds of bank risk professionals said they expect credit card delinquencies to fall or remain flat, but expect credit card balances to grow. The latter is not entirely good news, as it could mean smaller monthly payments!