Americans seem to love credit cards – so much so that credit cards have claimed the top spot as the preferred American method of payment. The 2016 U.S. Payment Study conducted by Total Systems Services (TSYS), a Georgia-based payment processing company, found that credit cards were the preferred payment method for Americans, edging out debit cards for the first time in the six-year history of the study.
Use of debit cards has been on a steady decline in preference, falling from 48% in 2013 to 35% in 2016, while credit card preference has been on the rise (from 33% in 2013 to 40% in 2016). Cash has stayed relatively constant over that time period, remaining between 9% and 11%.
Why have credit cards claimed the top spot? The TSYS survey breaks down the data and suggests reasons for the switch, including an unintended consequence of government policy.
Consumers are being drawn to credit cards because of the increased variety and volume of rewards programs. When asked to rate the attractiveness of credit card features, respondents overwhelmingly chose the type of reward as the favorite feature – almost doubling the percentage of respondents focused on the interest rate/finance charges and the brand of card.
Income provides another clear dividing line. By a substantial margin, all subcategories of annual income below the $75,000 threshold preferred debit cards as their payment method. Respondents above the $75,000 threshold preferred credit cards by an even larger margin, and those above $150,000 had a 50-percentage-point preference for credit cards (69% compared to 19% for debit cards).
Combine these two and the inference appears – credit cards are gaining in popularity in large part because of improved rewards programs, and wealthier Americans are more likely to be in a position to use them. Increased variety means that consumers are more likely to find cards tailored to their preferences and earn larger rewards via higher purchase levels.
A separate analysis by Magnify Money backs up this premise, finding that rewards spending with the six largest credit card issuers has more than doubled over the past seven years (reaching $22.6 billion in 2016).
To address the decline in debit card popularity, we turn to government policy. The Dodd-Frank Act, designed to address the housing and financial crisis, included an amendment that limited the amount that banks could charge retailers for every swipe of a debit card. As a result, banks began to reduce rewards on debit cards and increase fees wherever possible in an attempt to regain the revenue lost via Dodd-Frank limitations.
However, the amendment did not address credit cards in a similar fashion. Suddenly, banks had greater incentive to steer consumers toward credit cards instead of debit cards. Debit cards have become more of a reliable and expected complement to a bank account, while credit cards are engaged in a race to offer the most attractive rewards within specific market segments.
TSYS found that debit cards are still the preferred method for everyday purchases, such as supermarket and gas station charges – but expect that gap to close as rewards programs expand the purchase types available for rewards and consumers try to maximize rewards by running all eligible expenses through their credit cards.
Even if Congress makes good on repealing elements of Dodd-Frank, don't expect the tide to turn back toward debit cards anytime soon. The constantly improving rewards programs of credit cards – and people's attraction to them – are likely to keep credit cards in the driver's seat for the next few TSYS surveys.
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