For Gun-Shy Consumers, Debit Is Replacing Credit

The recession has cooled the American ardor for living on credit. After years of saying "Charge it," consumers are more often paying with their debit cards instead.

Worry about jobs, fear of fluctuating interest rates on credit cards and wariness about spending too much are contributing to the change.

"People are managing their money in a different way," said David Robertson, publisher of the Nilson Report, which tracks the credit card industry. "You clearly have a situation where those people who have jobs are exhibiting recession anxiety and they are making more debit transactions."

Nine months ago, Alyson Chadwick, a public relations representative for a nonprofit organization on Capitol Hill, got a debit card with a MasterCard logo so she could use it anywhere for purchases. Carrying cash was unsafe, she thought, and a debit card would help her manage her spending better.

"I use my credit cards hardly at all," she said. "I don't even carry them with me."

Trish Preston, head of U.S. debit for MasterCard, said the changing fortunes of debit and credit tell the story of how the recession has transformed consumer spending.

"Think about what's happening in the economy," she said. "Appliances, furniture, jewelry: Those are very sensitive to the economy, and those have generally been credit spending categories."

Debit cards, meanwhile, tend to be used for routine necessities such as groceries and gasoline. "Those kinds of expenditures are happening," she said.

The Federal Reserve said that revolving credit, primarily credit cards, dropped by $6.1 billion in July, or 8.1 percent on an annualized basis. Debit card usage, meanwhile, had been steadily growing over the years but has surged in this recession.

Credit cards draw on money borrowed at often high interest rates; debit cards withdraw money from the cardholder's bank account.

Visa announced this spring that spending on Visa debit cards in the United States surpassed credit for the first time in the company's history. In 2008, debit payment volume was $206 billion, compared with credit volume of $203 billion. MasterCard reported that for the first six months of this year, the volume of purchases on its debit cards increased 4.1 percent, to $160 billion, in the United States. Spending on credit and charge cards sank 14.8 percent, to $233 billion.

"Consumers are rational thinking individuals, and they're going to shift their behavior in a way that fits with their current economic situation," said Scott Strumello, an associate with the Auriemma Consulting Group, a Long Island-based payment card advisory firm. "They're thinking more seriously about it, and many may decide, 'I'm going to use debit where I can and reserve credit for larger purchases.' "