Debit card use climbs, but will consumers need to recharge?

In another sign that the recession is pushing Americans to change their spending habits, Visa (V) and MasterCard (MA) both say debit card transactions on their networks are surging while credit card purchases fall.

That's probably a good sign for an over-leveraged populace, but it's most likely temporary. "Consumers are much more worried about future sources of income and they're charging less and saving more," says Tony Plath, a professor of finance at the University of North Carolina at Charlotte. "That won't last."
At MasterCard, debit transactions grew 5.6 percent, to $110 billion, in the first three months of this year and now account for 46 percent of all spending on cards in the company's network. That's compared with 38 percent a year ago and 31 percent in 2007. And debit purchases made up more than half the total volume on Visa's card network, the world's largest, for the first time in the final three months of last year.

Faced with rising unemployment and declining home values, people are reigning in their use of credit cards. And banks expect those same trends will push defaults higher, so they're reducing the amount of credit they're willing to extend to card holders, raising fees and hiking interest rates.

All told, the most recent data from the Federal Reserve shows consumers slashed their borrowing at an annualized rate of $7.8 billion, or 9.7 percent, in February, much more than analysts expected. It's the biggest drop in dollar terms on record and the sharpest percentage decline in more than 30 years, according to USA Today.

But while there's little doubt consumers need to borrow less and save more, Plath says, rising unemployment will force people to begin charging again.

"We'll start to see people charge more as we head into the summer," Plath predicts. "Credit card balances will start to rise a little bit because people will run out of savings to spend money on day-to-day consumables."

De-leveraging may have to wait.
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