Tracy Davidson

Credit card usage is slowing. Revolving credit — largely made up of credit card debt — fell by nearly 20% in November, the largest drop on record, according to the Federal Reserve, reflecting less borrowing by consumers and banks’ tighter lending standards. Through October, the number of new credit card accounts was down 46% from the same period in 2008, according to Equifax.

But abandoning credit cards is a much more radical step than using them less. Consumers who don’t own a credit card often have a hard time renting a car. Some hotels won’t book rooms to travelers who want to pay with a debit card or cash. Those that accept debit cards may place a hold on several hundred dollars in the customer’s bank account, which could cause checks to bounce. And many consumer experts say that responsible use of credit cards is one of the most effective ways to build a good credit record.

Reasons consumers are opting to live without credit cards:

•Desire for a simpler lifestyle. Two years ago, Adam and Courtney Baker decided to reduce their debts, sell most of their stuff, and spend a year or two traveling around the world. By selling their small business and a rental property, they were able to pay off more than $11,000 in credit card debt.

Initially, they planned to use an American Express card during their travels, says Adam Baker. But once the couple wiped out their debt, they decided to stick with debit cards and cash. Going without credit cards helps them keep a handle on their spending and suits their stripped-down lifestyle, says Baker, 25, a freelance writer whose blog about his family’s experience is titled Man Vs. Debt (www.manvsdebt.com).

•Increased acceptance of debit cards. A decade ago, consumers who didn’t want to use credit cards had two choices: carry a lot of cash or write checks and hold up the supermarket line. Today, debit cards blend the discipline of cash with the convenience of plastic and are accepted by most merchants that accept credit cards. In recent years, their popularity has soared.

A July 2009 survey by Auriemma Consulting Group found that 28% of consumers had shifted the way they pay for purchases in the past year, with an increase in debit card usage coming at the expense of credit cards. Forty-six percent of consumers surveyed said they believed debit cards helped control their spending.

•Outrage about industry practices. Tim McFarlin, a consumer bankruptcy attorney in Irvine, Calif., 34, stopped using credit cards eight years ago because he thought the industry’s business practices were unfair to consumers. “Any time there’s even a hint of a financial issue in the consumer’s life, the credit card company will raise the interest rate to the high 20s, or 30%,” he says. “They’ll do anything they can to make life as difficult as possible.”

Last year, Congress enacted legislation that will make it more difficult for credit card issuers to raise interest rates on existing balances and charge certain fees. But those rules don’t take effect until Feb. 22, and in anticipation of the change, credit card companies have aggressively raised interest rates and fees, even for borrowers who pay their bills on time. In addition, credit card companies have lowered credit limits for many customers.

Drawbacks to doing without

Some consumer experts say consumers who have sworn off credit cards are misguided. Among the reasons:

•Debit cards provide fewer consumer protections than credit cards. If fraudulent charges show up on a credit card bill, the card holder can simply refuse to pay them. Federal law limits credit card holders’ liability to $50 of fraudulent charges, and most card issuers have zero-liability policies for victims of identity theft.

Federal laws also limit liability for debit card theft, but resolving the problem is more complicated. Money used with a stolen debit card is immediately drawn from the holder’s account, which means the consumer must fight to get the funds reimbursed. In the meantime, outstanding checks could bounce.

It’s also more difficult to dispute a defective purchase that has been paid with a debit card. Credit card holders can refuse to pay for the item; debit card holders have to battle for a refund.

And while debit card users don’t have to worry about interest rates and late fees, they need to keep close tabs on how much money is in their bank accounts. Otherwise, they risk triggering hefty overdraft fees on debit card purchases that exceed the amount of available funds. Overdraft fees at the largest banks average $34, which means even a few small overdraft purchases could trigger hundreds of dollars in fees.

•Responsible use of credit cards helps consumers develop a good credit profile. Consumers who don’t carry a credit card have an average credit score of 563, vs. 689 for those with at least one card who carry a monthly balance, according to Credit Karma, a consumer website that provides free credit scores. The data were based on TransUnion credit scores.

FULL STORY

http://www.usatoday.com/money/perfi/credit/2010-02-08-creditcards08_CV_N.htm