Tuesday, May 5, 2009

The Debit Card Habit and the Saving Rate

The 4 percent saving rate among U.S. consumers in February was not a fluke. The saving rate was basically the same, 4.2 percent, in March. Consumer saving surely went up in April too as many of the income tax refunds arrived. Last spring was when the saving spree got started, as people used their stimulus checks to pay down their credit cards.

In economic terms, paying off a loan and putting money into savings are equivalent. Either way, you’re using money you earn to boost your financial strength. And people are doing more of that these days. For years, the U.S. saving rate was near zero. The saving rate declined slightly a year ago as many people lost their jobs but tried to keep up their lifestyles. But now, the consumer mood is more sober, and people are saving to try to position themselves better for possible rough spots ahead.

There are several good reasons why people are saving this year, but the debit card habit might be the most important reason. Once you get in the habit of shopping with a debit card in place of a credit card, it is easier to control your spending, and therefore easier to save. And debit cards have become much more popular in the last two years.

Debit cards surpassed credit cards around the beginning of this year, according to results released last week by Visa and Mastercard. After half a century of increasing every year, the number of credit cards is actually declining now. Also declining: the number of active credit cards, the number of credit card transactions, and the dollar volume of credit card transactions. But debit card transactions are expanding almost fast enough to make up the difference.

A decade ago, some shoppers thought there was a stigma attached to using a debit card. Perhaps it meant that you did not qualify for a credit card. But if there was ever any stigma, it is gone now. Most consumers have at least one credit card and at least one debit card, but only the debit card proves you have money in the bank. Banks are cutting credit limits and imposing stiff new fees on credit card accounts, but you don’t have to worry about that if you use a debit card.

Many consumers find that shopping with a debit card makes spending more real to them. The money is out of your hands the moment you make the purchase, the same as if you paid with cash. The simplicity and finality of the debit card transaction is part of the debit card’s appeal.

This is something for economists to note as we look forward. Consumers may have switched to debit cards because of the recession, in part, but that does not mean they will switch back to credit cards when the recession is over. The debit card habit may last for decades. The pattern of saving that goes with it will last too. This has long-term implications for the economy. We already knew that the economy of the next decade would be driven more by income and less by borrowing. The debit card habit is another reason why this will happen.