How we pay for things

The Federal Reserve Bank of Boston issued a press release Thursday, announcing the release of its “2008 Survey of Consumer Payment Choice.” Apparently, it’s still working on the 2009 edition.

However, in spite of it not being the most timely of reports, the survey contains some interesting data about how American consumers pay for things, and how quickly our choice of instruments is changing. The Fed identified nine different payment instruments:

1. Cash
2. Check
3. Money order
4. Travelers check
5. Credit card
6. Debit card
7. Prepaid card
8. Online banking bill payment
9. Electronic bank account deduction

Credit cards less important

The Fed’s press release led with the decline in the popularity of credit cards. And that’s a trend that’s growing. In 2008, 92.5 percent of respondents said that they had–or at some point had had–a credit card, but 14 percent reported that they had by that time discarded theirs. Using as yet unpublished data, the Fed says that that number jumped to 16.5 percent in 2009.

“Discarded” may be the wrong word here. Those figures include people whose credit card companies withdrew their accounts, so it might be reasonable to expect 2010 to show a continuing upward trend.

Credit card companies not panicking–yet

People may be dumping their credit card companies–and vice versa–but most still recognize just how convenient cards are. Among the 78.3 percent of consumers who have a credit card, the number of such cards each possesses is quite high–an average of 3.5. Across the entire U.S. population that comes to 2.7 credit cards per head.

But just because people have plastic in their wallets, that doesn’t mean that they use every card equally. And the credit card trends that issuers fear most are those that show the rise of the debit card. Even in 2008, the Fed found that 65 percent of consumers used credit cards to make retail payments, compared with 64.5 percent who used debit cards. Since then, debit card use has overtaken credit card use.

This is at least partly reflected in the Federal Reserve’s monthly analysis of consumer credit. The latest edition of this, published October 7, shows that credit card debt had dropped from $957.5 billion in 2008 to $822.2 billion in August 2010, a fall of more than $135 billion. True, much of that has been a result of card issuers writing off uncollectible debts, but surely some must be down to consumers reducing their credit card use.

Credit card rates largely to blame?

If credit card companies want to apportion blame for the changing face of their businesses, they could begin by looking in the mirror. Too many of them included “gotcha” clauses in their agreements that triggered unreasonable penalties for minor infringements. The more outrageous fees were capped by recent legislation, but this didn’t touch–let alone cap–credit card rates.

At the time of writing, indexcreditcards.com says that these average 16.77 percent, which means that for everyone paying less than this, there are others struggling with more–20, 25, 30 percent or–for those with poor credit–even higher rates. No wonder, many prefer to use debit cards.

Low interest credit cards

That’s a shame, because there are real benefits to using a credit card rather than a debit card, especially in terms of consumer rights. The good news is that, providing you have an excellent credit score, there are still low interest credit cards out there.

As long as people can use their cards without the fear of “gotcha” fees and rates, the decline in credit card use is likely to be slow and limited. But the future of the industry is in card issuers’ hands.

Published 11/01/10 (Modified 03/25/13)