For Gun-Shy Consumers, Debit Is Replacing Credit

Alyson Chadwick uses her debit card for a latte. "I use my credit cards hardly at all," she says. (By Michael Temchine For The Washington Post)

For three decades, credit cards, which emerged about 50 years ago but were not in widespread use until the 1970s, have reigned as the preferred mode of payment, mostly on big purchases, for baby boomers and their children. Before that, people used cash, bank loans or the installment plan.

Baby boomers typically charged responsibly. Their children, who grew up in the mostly prosperous 1980s and 1990s, became dependent on cards from an early age, partly because card issuers marketed heavily on college campuses. Unlike their parents, they tended to see credit cards as long-term loans. And they charged too much.

"An awful lot of kids grew up in a very big house and they grew up with pretty much everything they wanted, and then they became adults and their parents, rightly or wrongly, probably wrongly, conditioned them to a set of conditions they cannot afford," said Lewis Mandell, professor of finance and business economics at the University of Washington and a senior fellow at the Aspen Institute.

Industry executives said much of the debit card growth is fueled by a growing disdain for carrying cash and writing checks. But they also acknowledged that credit cards have fallen out of favor with consumers who want to save more and limit their discretionary spending. In July, the personal savings rate reached 4.2 percent, up from about 1 percent of after-tax income early last year, according to government data.

"The real question is: Is consumer behavior permanent?" Strumello said. "And that's something where the jury is still out. Consumers have made moves in other downturns."

Mandell said the next generation might reject credit after seeing their parents struggle with money. "I think the next generation may be self-correcting depending on the duration and magnitude of the downturn," he said.

There is some indication that the shift to debit is partly a visceral reaction to credit card industry practices in the past few months. Since a law was passed in May that will limit the industry's ability to raise rates and fees, many issuers have cut credit lines and increased rates, forcing borrowers to look for other modes of payment.

"Part of this is kind of consumer backlash against the industry due to its practices," said Curtis Arnold, founder of the consumer Web site CardRatings.com.

And debit cards have their own drawbacks. Many banks automatically enroll customers in programs that allow them to spend more than they have in their accounts -- for a fee. Such overdraft fees, which average $35, have come under scrutiny recently. Congress is considering legislation that would require banks to get customers' permission before approving transactions that would send their accounts into the negative. A number of large banks, including Bank of America and J.P. Morgan Chase, announced recently that they would voluntarily make those changes.

TowerGroup, a research firm for the financial services industry, is predicting that debit card use will increase through 2015. The firm found that in less than 15 years, debit card transactions in the United States grew from 1 percent of non-cash transactions to more than 50 percent.

Larry Jones, for example, wants nothing to do with credit cards once he pays off his $2,500 bill. He recently moved from Chicago to live with his brother in Baltimore after losing his public relations job. With no steady income, he has stopped using credit -- "You're spending money you don't technically have," he said -- and switched to his Chase debit card.

"This works better for me," he said. "It gives me peace of mind to use my debit card. You take the heat up front."