5 Reasons Credit Card Companies Won’t Survive

Consumers are replacing plastic with other payment methods.

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Credit cards might be on their way out. The Fed reports that credit card debt decreased at an annual rate of 2.25 percent in January and a www.creditcards.com poll taken in February found that one in ten consumers had either given up or lost use of a credit card in the previous eight months.

Part of the reason is consumer choice: We’ve grown wary of paying so much in the form of fees and interest rates. But the decline in plastic is also card issuers’ own doing. Companies have cut credit limits and raised interest rates after getting burned during the recession. Here are 5 reasons why credit cards’ days might be numbered:

1) Card companies raised interest rates, making credit cards more expensive, and therefore less useful. According to the website www.indexcreditcards.com, the average interest rate is now 16.8 percent, compared to closer to 14 percent two years ago. At the same time, the days of extended introductory interest rates and 0 percent APR (annual percentage rate) are largely over.

[See The Best Credit Card for College Students]

2) Card companies have also slashed credit limits, which means consumers have less access to credit. The total available credit on new credit cards had declined to almost half of what it used to be, according to the credit reporting agency Equifax. People with poor or fair credit scores find it particularly difficult to take out new credit cards.

3) Debit cards and cash are replacing plastic. Jeremy Simon, a reporter for www.creditcards.com, says that consumers are turning to debit cards and cash in place of credit cards. “That’s partially because cardholders are trying to lower their debt levels in an uncertain job market,” he says. When consumers pay with debit cards, they know they’re using money that’s already in their bank account. A recent BIGresearch survey found that almost one in three consumers say they pay with cash more often than they used to. At the same time, Javelin Strategy & Research found that for online purchases, the value of sales by debit cards rose 21 percent from 2008 to 2009.

4) Card companies are facing more restrictions, which might make it more difficult for them to turn profits. Ever since the Credit Card Act went into effect earlier this year, card issuers have had to abide by a stricter set of rules: They must give cardholders more time to pay their bills, they are no longer allowed to make “arbitrary” rate increases, and they can’t surprise consumers with “over the limit” fees. Card companies have long argued that such restrictions could harm their business model and potentially even cause some of them to withdraw from the marketplace. Meanwhile, consumer default rates also rose during the recession, putting further pressure on card companies’ bottom line.

[See: Credit Card Fees: 5 Things You Should Know]

5) Consumers are getting smarter – and credit card debt isn’t a smart thing to have. The BIGresearch survey also found that two in five respondents were focused on paying down debt and about the same number wanted to decrease their overall spending and add to their savings. That suggests the recession has prodded consumers to get on top of their financial situation, which usually includes eliminating or minimizing credit card debt.