Consumers Getting Smarter To Stay Away From Credit

The current mindset among American consumers seems to be to stay away from credit card purchases, no doubt scared away by the high cost of credit card debt which hurt a lot of consumers during the height of the economic downturn.

Now, consumers are doing everything they can to keep their credit cards away from the cashier during the holiday season. For their shopping, consumers are using cash, bank account direct debits, using free financing services and even cashing in frequent flier miles. Basically, they are doing everything they can to avoid using credit cards for their holiday shopping.

The move away from credit cards is primarily fueled by the desire of the majority of consumers to keep under their budget and to avoid expensive interest rates which have been hiked considerably by credit card companies. Aside from consumers keeping away from credit cards, credit card companies have also been limiting the access to credit, even to consumers who are considered to be low risk borrowers.

Bryan Eshelman, consultant AlixPartners’ managing director of retail practice says that consumers are doing their best to discipline themselves in terms of spending, something which they can best do by sticking to cash for purchases. A recent survey of AlixPartners showed that the top concern among shoppers is to eliminate their personal debt.

For merchants, consumers moving away from credit cards means a drop in costs – specifically in credit card transaction costs. However, the drop in credit card usage means that merchants are no longer able to track the purchasing habits of consumers, something best tracked through credit card transactions.

Credit Union National Association chief economist, Bill Hampel, calls the consumer switch away from credit cards as “seminal”. According to him, consumers are trying a number of new spending behavior, changing the way they spend and how they pay as a response to the scary economic situation. He adds that a lot of these new habits, such as using cash for payments, will most likely linger, what with unemployment rates to continue to remain high for a few more years and credit lines getting scarcer.

The shift among consumers away from consumers has also given rise to alternative payment methods such as deferred payments and layaway plans. Services such as those from PayPal and Bill Me Later are also becoming more and more common among consumers. PayPal is an online payment service and Bill Me Later offers free 90 day financing for consumers.