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Credit v Debit

Friday, 30 September 2011

It has been the case for some time in the UK that debit cards have become the card of choice for many consumers presumably down to a need to retain greater control over spending in these stringent times. Two recent reports from the UK Cards Association and researchandmarkets have confirmed this trend and looked at some of the issues behind it. In the UK, there are more credit cards in circulation than in other European countries, although their popularity has declined over the last few years. According to the UK Cards Association, 61% of UK consumers hold a credit card. This high level of card holding is partly due to the ease of obtaining cards in comparison with other European countries and the lack of regulation in terms of interest rates, allowing card issuers to price according to a risk assessment.

The UK Cards Association points out that the 2000s was a decade of two halves. Whilst the first half saw strong growth across all forms of plastic, from 2005 there was a sharp change in consumers’ appetite for credit cards, long before the recession. During the first half 22.8 million new credit cards were issued rising to a total of 70 million in 2005 but by the end of the decade the number of credit cards had fallen to 55.6 million and outstanding balances were £10 billion lower. Consumers’ spending on debit cards almost doubled from 2005 to 2010, fuelled by a migration from cash and increasing use of debit cards for smaller value transactions.

The mid-point of the decade saw an increasing preference for debit cards, tighter lending practices and consumers adopting a more cautious attitude to borrowing. From 2005 onwards, two million more adults decided not to use their card for borrowing, paying off their balance in full each month instead. This trend has continued – last year, 62% of cardholders paid in full each month, compared to 55% in 2005, with the over-45 age group accounting for much of the change.

Over the decade, an extra 35 million debit cards were issued, bringing the number in circulation to 84 million by 2010. Those cards were used three times more often than credit cards last year (6.5 billion compared to two billion) to spend a total of £299 billion – almost four times more than was spent on debit in 2000 (£77 billion). It seems like the marketing departments of credit issuers are going to face a challenging few months (or maybe years) to tempt consumers back to the fold.

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