Consumers Prefer Plastic To Checks

March 15, 2004
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LANSING — Paper is out and plastic is in with consumers who increasingly prefer swiping their debit cards to paying with cash and checks when they shop.

Last year, 31 percent of payments were made with debit cards while only 47 percent were made using cash or checks, according to the American Bankers Association (ABA). In 1999, debit cards accounted for only 21 percent while cash and checks together accounted for nearly 60 percent of consumers’ in-store payments.

2003 was the first year credit and debit cards edged out cash and checks as the preferred method for in-store sales. The cards accounted for 52 percent of purchases.

“Consumers like debit cards because they’re easier to use than checks, they’re safer than cash, and many people use them as a money management tool so that they don’t run up the balance on their credit card and have more interest charges,” said John Hall, associate director of public relations at the ABA.

But the rise in debit card use doesn’t mean that people are saving more, just changing their payment patterns.

“When I was growing up, the attitude was, pay for it in cash if you can. Only put things on credit that are long-term investments,” Hall said. “But times have changed. Some people use credit cards to get (frequent flyer) mileage, so they put everything on their credit card and yet pay it off every month. It’s just different structures for different folks.”

A debit card draws on the customers’ own money from their accounts. In contrast, credit cards are a form of short-term borrowing. With a credit card purchase, the credit company pays the retailer and the customer repays the credit company, usually with interest.

John Mayleben, vice president of sales and marketing at the Michigan Retailers Association, said debit cards are increasingly used for so-called “micro payments.”

“The folks who would yesterday have pulled a $10 bill out of their pocket to pay for a cup of coffee at the local coffee shop pull out their signature-based debit card,” he said. “People think nothing of pulling out a piece of plastic for smaller purchases.

“I’m a prime example of someone who doesn’t carry a checkbook anymore. If I can’t use my Visa card, I’ll choose to shop elsewhere, which is one reason you see grocery stores, fast food restaurants, doctors’ offices and movie theaters taking credit cards today.”

According to the association’s study of Michigan retail stores from Thanksgiving through Dec. 31, the number of debit and credit card transactions rose by more than 10 percent compared with the same period last year.

Todd Willoughby, vice president of communications with the Michigan Bankers Association, said increased debit card use is not only convenient for consumers and banks, but also for “retailers, who have transactions processed in real time and don’t have to worry about a check getting bounced.”

Another contributor to the popularity of debit cards is that many card issuers offer rebates and entries to sweepstakes to encourage consumers to use debit cards rather than credit cards, checks or cash, ABA’s Hall said.

But for consumers, the convenience of swiping a debit card may lead to fees if they choose to punch in a PIN code rather than signing a receipt.

The 94 percent of debit cardholders who have a Visa or MasterCard can choose between the two options when paying, and Hall said the fee is typically 25 to 50 cents per transaction.

He estimated that only about 10 percent of banks charge a fee for a card transaction and said that consumers should know when they open an account or get their bank statement whether they pay for transactions.

For credit card users, the bill is often much more expensive. Greg Dimkoff, a finance professor at Grand Valley State University and teacher of personal finance, said one in six credit cardholders pay a 30 percent interest rate on their cards, but it’s hard to get along without one.

“You need a credit card to rent cars and for online transactions. We’ve reached a financial point in society where we can’t get along without a credit card. It’s forced upon us,” Dimkoff said, adding that consumers wouldn’t get into as much financial trouble if they didn’t have credit cards because they’d only be spending money that they had saved.

From 1995 to 2000, the number of credit cards in use grew by an average of 41.8 percent annually, according to the Federal Reserve.

Although the number of debit card transactions has more than tripled in the past five years and Hall expects the numbers to keep rising, he predicted plastic won’t completely replace paper payments any time soon.

“I think cash and checks will be around for a long, long time because people like that as an option,” he said.

“People use different forms of payment for different things. Generally, you don’t find a person who’s an exclusive user of, for instance, cash. They use all of their available options. They want to pay their rent by check and pay for their hot dog by cash.”    

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