by Joseph Kenny | 12/17/09

Consumer spending is one of the most important indicators of the strength of the economy, and throughout any given year, the holiday season is the most important time for strong consumer spending. Recent increases in the GDP point to economic improvement, but rising unemployment threatens the stability of this growth. Therefore, it’s up to consumers during the holiday season to demonstrate that the economy is improving through strong spending.

Unfortunately, even if people go out in droves to purchase their holiday items, a new trend might curtail the success of the holiday season: no credit card. Instead of consumers storming stores armed with big lines of credit, the percentage of consumers expected to pay for gifts with cash or credit is predicted to rise dramatically. It is estimated that about 71% of consumers will use cash or debit cards instead of credit cards for most gifts, according to a recent National Retail Federation (NRF) survey.

Another survey from the United Services Automobile Association (USAA), a financial services firm based in San Antonio, determined that two-thirds of all consumers plan to use cash more often this year than they did in 2008. This is all grim news for retailers, because individuals who use credit are more likely to spend more than those who rely on the money they already have. An NRF spokeswoman, Ellen Davis, explained that stores sell more stuff to people who are using credit cards as opposed to cash or debit cards. When consumers use a credit card, they can spend more than they originally intended, but with cash or debit cards, this is simply not a possibility.

For retailers, there are more downsides to no credit cards. As bad as it is to find out that consumers might spend less overall, it is also true that they are less likely to purchase at all if they are required to take the actual cash out of their wallet. Consumers are often more acutely aware of what they’re spending when they see it. When they use credit cards, many consumers are less apt to connect the dots about what they’ve charged and how much it will cost. This means less impulse buying, as consumers will only purchase what they have the money to afford at the time.

Debit cards are largely the same, but do not result in the same level of frugality as cash. The issue is how much money is available in the consumer’s checking account. For those with a tight balance, they will be extra cautious about what they spend to avoid overdraft fees. Plus, when they use a debit card, consumers lose the money immediately, so they will be less likely to buy something on impulse if they know they need the money in their bank account for the house payment, food, or other necessities. With a credit card, these concerns don’t apply, which makes it easier for people to overspend.

The NRF concluded that about 28.3% of consumers intend to use credit cards most often for their holiday gift purchases this year, a dip from 31.5% last year. This percentage has declined steadily; in 2007, nearly one third of consumers used their credit cards most often for holiday purchases.

If there’s any benefit to retailers in this growing trend, it’s the fact that responsible consumers can come back to the stores again to buy more at a later date. Even though their current quarter might not be as strong as they might have hoped, retailers can at least appreciate the fact that those customers will be able to afford future purchases.