Why Consumers Are Shunning Plastic

Credit card usage declines as people say ‘no thanks’ to high fees and rates.

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After building up credit card debt in graduate school, New York resident Stacy Whitman, 35, turned her back on the cards that once funded her lifestyle. "I just don't ever want to go down that road again," she says. "If I don't have the money for it, I don't get it." Whitman, who works in book publishing, closed her cards and now uses her debit card for online or phone purchases.

She's not alone in shunning plastic. According to the credit reporting agency Equifax, the number of new cards opened in 2009 fell to 32 million from almost 70 million in 2007. Consumers also hold less debt; the Federal Reserve reports that credit card debt decreased at an annual rate of 2.25 percent in January. While part of the reason is that people like Whitman are scaling back, the credit card industry itself is also causing the decline by offering less credit to customers. Equifax found that the total available credit on new cards as of December 2009 had declined to a total of $10.6 billion compared with more than twice that two years ago.

[See The Best Credit Card for College Students.]

"If you're a serial spender or charger, and you have a lower credit limit, you're able to charge less and carry less of a balance," says Bill Hardekopf, chief executive of www.lowcards.com. At the same time, he says, credit card interest rates have gone up—the average rate is now close to 17 percent—so consumers are wary of racking up too much pricey debt. "It's much more expensive to carry debt on your credit card," Hardekopf adds.

The days of high credit card debt also turned out to be expensive for the credit card companies, which faced an uptick in defaults during the recent recession. "They had given credit much too freely and approved high-risk people. Issuers found themselves in a precarious situation, so now they've cut back," explains Hardekopf. That's one reason consumers are receiving far fewer card offers through the mail, in addition to facing heightened scrutiny when applying for new cards.

The recession also appears to have made people smarter about avoiding expensive debt. "Without great confidence in their long-term financial picture, people are much more likely to try living within their means right now. That means they're using money they already have in their pockets," says Adam Jusko, founder of IndexCreditCards.com.

[See 5 Reasons Credit Card Companies Won't Survive.]

Many card companies raised their interest rates in advance of the newly implemented credit card regulations, making credit card debt even more expensive for consumers, Jusko adds. "If you're a consumer with a sizable credit card balance, and your interest rate has increased while your credit line has decreased, you are now paying more each month just to run in place. The thought of using that credit card is much less attractive, at least until you feel that you've got your financial situation back under control," he says.

Some studies suggest that cash and debit are replacing credit cards. Javelin Strategy & Research recently found that for online purchases, the value of sales by debit cards rose 21 percent from 2008 to 2009.

[See 10 Ways to Save on Big-Ticket Items.]

But consumers aren't becoming debt-free altogether. Other types of loans—including auto and personal loans—are up, the Fed reports. Whitman reflects that trend. She took out an auto loan when she needed a car to get around, and she has a line of credit for large computer purchases. But she's grown strict about avoiding credit card debt. She says, "I've learned my lesson the hard way …I'd rather keep a close eye on my budget, pay off my student loan debt, and save as much as possible."