The past 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.
When I did a quick straw poll with a few of my friends living in the US, I found the ground reality to be quite different, which made me wonder if the pundits are jumping to conclusion.
During the latter half of the credit crunch, we’ve been hearing of a lot of rejections of credit card applications. Even someone of the stature of Michael Arrington, the founder of the famous TechCrunch blog, recently complained that his application for an American Express credit card was rejected. Even if the cold and objective bankers at Amex were not impressed by the fact that he was named as one of the world’d Top 100 influential persons by TIME magazine, Arrington’s credit 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 was initially wondering if “decisioning” systems – the software used by credit card companies to decide which applications to accept and which to reject – have undergone a drastic change during and after the Great Recession. My wonder changed to conviction when I read in a recent NYT article that “More than 15 million Americans lost their cards because of strict credit-card regulations that were passed last year…”.
Furthermore, many people – including Arrington – have suddenly seen their credit limits slashed by their credit card issuers – Chase, in Arrington’s case – for no obvious reason in the last few months.
As a result, it appears that American consumers are no longer able to charge their expenses to their credit cards to the extent they could in the past. So, the shift to debit and prepaid cards reflects lack of choice more than any new-found need to lower debt and boost savings.