Shift From Credit To Debit And Prepaid Cards

The last year has been awash with news and analyst reports about how American consumers are forsaking credit cards and increasingly using debit and prepaid cards. Given that credit cards are a “pay after” instrument as against debit and prepaid cards that are “pay now” and “pay before” instruments respectively, pundits have concluded that the shift marks a major change in consumer behavior. According to them, the average American has chosen to be thrifty and has realized the need to live within their means so that they’re able to avoid debt in the aftermath of the recent crisis.

A quick straw poll revealed a very different ground reality, which got me thinking if there was some other explanation for the empirically observed shift from credit to debit and prepaid cards.

Looks like there is. 

Around this time, I read a post by Michael Arrington, the founder of the famous TechCrunch blog, complaining that American Express rejected his application for a new credit card. Even if the objective and dispassionate bankers at Amex were not impressed by Arrington's presence in TIME magazine's List of Top 100 Most Influential Persons, his FICO score of 748 – which is considered “excellent” and falls in the 78th percentile – should’ve ensured that he got the credit card. But, fact is, he didn’t.

I started wondering if “decisioning” systems – the software used by credit card companies to decide which card applications to accept and which to reject – have undergone a drastic change in response to the slew of regulations (e.g., CARD Act) introduced in the aftermath of the Great Recession.

That indeed appears to be the case: According to this recent New York Times article, “More than 15 million Americans lost their cards because of strict credit-card regulations that were passed last year…”. Besides, many people, including Arrington, have suddenly seen their credit limits slashed unilaterally by their credit card issuers – Chase, in Arrington’s case – for no obvious reason in the last few months.

This suggests that American consumers are no longer able to charge as big a chunk of their expenses to their credit cards as they could in the past. So, the shift to debit and prepaid cards reflects lack of choice as strongly as the desire to lower debt and boost savings.