New York - Cash or credit? For more Americans, who have already maxed out their credit cards or are just trying to manage their spending better in the tough economy, the answer is increasingly the old-fashioned one.
Retailers like Wal-Mart Stores, Target and JC Penney are noticing a marked shift away from credit cards in favour of cash and debit cards. A big factor is less credit available as major card issuers cut spending limits and raise fees even for customers who pay their bills on time.
The shift ends Americans' long love affair with credit cards and is one of the changes in consumer behavior that has emerged since the financial meltdown that could depress consumer spending this holiday season and affect shoppers' habits long afterward.
Particularly during holiday seasons past, shoppers could count on a pile of plastic to give them the extra financing needed to splurge on presents before they had to face the bills in January or later.
But even when the economy recovers and credit loosens up, analysts say Americans - shaped by what could be a deep and long-lasting recession - are likely to stick with buying only what they can afford just as their parents or grandparents did after the Great Depression of the 1930s.
"I think this is a new way of life," said Robert Smith, of Loves Park, Illinois, who along with his wife has been using cash and debit cards to finance their spending, including vacations, since they paid off their credit card debts in July.
Being more 'financially prudent'
"I like to be able to know that we paid for something. I hate monthly payments when you use a credit card."
Smith, who has four children ages 7 to 13 and owns a motivational training company called Drive and Grow Rich, says his business is down 20% this year, and since he is saddled with a mortgage, he does not want to get back into debt.
While the credit crunch is teaching consumers to be more "financially prudent," it's creating a lot of pain for both consumers and stores, said Curtis Arnold, founder of CreditRatings.com.
One sign of how strapped consumers are for credit - and buying only what they have the cash for - is that for the first time in 17 years, Penney's has seen swings in spending around payday cycles over the past three months.
That's common for discounters like Wal-Mart, but a rarity for a mall-based department store - suggesting that Penney's middle-income customers are feeling the pinch as well. Penney's President and Chief Merchandising Officer Ken Hicks noted that the chain has not seen swings in spending around payday since about 1991, when the US was entering a recession.
At Wal-Mart, the volatility in spending around payday - a drop in spending in the days before, followed by spending bursts right afterward - has become even more pronounced since September. Chief Financial Officer Tom Schoewe told The Associated Press that shoppers are now unable to buy even necessities in the few days before payday.
Debit card usage growing
Such swings became more dramatic last fall, but subsided when shoppers received their government rebate checks this past spring.
Eduardo Castro-Wright, president and chief executive of Wal-Mart's US division, told investors last month that credit card payments as a percentage of total payments fell 7.4% so far in the current fiscal year, which ends in January. That's a big reversal from the robust double-digit growth rates in credit cards over the past three years, he said.
Target executives told investors late last month that it is seeing lower credit card usage among its shoppers for the first time since 2001-2003.
At Penney's, Hicks said that use of the company's store credit card was flat during the third quarter. The use of credit cards issued by other parties declined by a couple of percentage points as a percentage of overall payment, he noted, while cash was up by the same amount. Hicks said he has not seen a decline in credit card use in five or six years.
Scott Hoyt, senior director of consumer economics at Moody's Economy.com. said that Federal Reserve data has never shown an annual decline in credit card use, but he acknowledged that there is not any solid payment data. Visa said that debit card growth is coming at the expense of cash and checks versus credit cards. And MasterCard Worldwide said consumers are increasingly paying with plastic - debit or credit - at the expense of cash and check, but did not break out which portion was debit cards.
But many Americans are using cash or debit cards because they are being forced to. Laura Nishikawa, an analyst at Innovest Strategic Value Advisors, a New York investment research firm, said that based on data from Visa, Master Card and American Express, the number of credit cards that consumers have fell 5% in the second quarter from the first quarter. That was mainly because consumers received fewer credit card offers, she said.
Attempting to lure customers into credit
For years, consumers tapped into inflated home equity and used credit cards to finance their spending. Now those spigots are being shut off, and job losses are mounting.
"Consumers are really struggling to find sources of cash to make purchases," Hoyt said. "The rapid job losses are taking a big bite out of labour incomes. Obviously, it's making it much more difficult to borrow."
Online jewelry seller Blue Nile, which reported a 23% drop in third-quarter profits earlier this month, noted that deteriorating credit has hurt sales of jewelry priced from $5 000 to $25 000.
Doug Scovanner, Target's chief financial officer, told investors on November 17 after disappointing third-quarter results that credit tightening across all US card issuers "has already had a very important adverse effect on our sales, and I'm sure it will continue to do so."
Target is further tightening finance terms for its card holders as it confronts increasing defaults, and has promised investors that it will become even more stringent if credit conditions keep getting worse.
But Target and other stores are finding themselves in the awkward position of wanting to tighten their credit terms to protect profits while at the same time realising that such moves could depress spending, Arnold said. So many stores are dangling generous interest-free finance offers and offering deep discounts of up to 2% if you apply for a credit card, he said.
Target is offering a 10% discount for new credit card holders, while Bluenile.com has teamed up with Bill Me Later to let customers delay payments for 90 days on purchases of $250 or more.
But don't expect Smith, the entrepreneur, to bite. He's sticking with his $2 000 holiday budget, much lower than the $6 000 he spent last year on gifts. He added that he and his wife are setting aside the holiday money in a separate account so they won't go over budget.
- AP