by Joseph Kenny | 10/24/09

American consumer debt is falling and some of that debt is on credit cards. What is replacing the use of credit cards are debit cards and they don’t create debt. After decades of buying goods and services on credit cards, many consumers are now trying to live within their means and only pay cash.

Of course carrying cash is not recommended so that is where the debit card enters the picture. With unemployment at 9.8 percent in the United States the use of credit is finally declining. The drop is due to two factors: the desire of consumers to reduce their debt burden, and 2) less credit availability. Even people with jobs and good credit have been surprised to find notices in the mail informing them their credit limits on credit cards had been reduced.

Between fluctuating interest rates, unemployment, the recession, reduced credit limits and a desire to reduce spending or household budgeted expenses, the debit card is taking on more significance.

The Nilson Report tracks the credit card industry and it reports, “People are managing their money in a different way” according to publisher David Robertson. He went on to say, “You clearly have a situation where those people who have jobs are exhibiting recession anxiety and they are making more debit transactions.”

According the US Federal Reserve, credit card use has declined by 8.1 percent on an annualized basis. This equates to a drop of $6.1 billion. This is $6.1 billion that was not borrowed at the high interest rates charged for credit card loans. This is historically significant because credit cards have been used as the primary funding source for large household purchases for 30 years. Now people are either postponing these purchases or are waiting until they have enough cash in the bank to use the debit card.

What is becoming apparent is that the last generation, the children of baby boomers, became dependent on credit cards to buy items they could not afford otherwise. Credit cards began to be used as a long term loan instead of short term interim financing. This generation grew up having never experienced an economic downturn so the recent recession has been more shocking to them than to others who have endured previous recessions. That is why baby boomers have been responsible credit card users in general.

The real question now is whether the increased use of debit cards is a long term or short term change in behavior. Will consumer behavior continue to increase savings rates while reducing dependence on credit cards? The real answer to this question won’t come until economic recovery is fully underway or complete.

One of the reasons there is uncertainty as to whether consumers are truly interested in changing their spending and borrowing habits is the fact credit card companies have forced some of the current changes by reducing credit lines. If it’s impossible to borrow more then borrowing amounts will decline.

The July consumer savings rate shows savings is at 4.2 percent per the US government. President Barack Obama has been pushing for government regulations that will naturally reduce consumer credit card debt while also asking consumers to borrow less and save more. The catch-22 is that consumers need to borrow money to a certain degree to keep the economic recovery moving forward.