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MADISON, Wis. — The Filene Research Institute has released a report examining how cardholders make the decision to use their credit or debit card at point of sale. Credit unions like other card issuers have a direct stake in the decision since credit card interchange is generally significantly higher than debit card interchange.The institutes’ study, “Debit vs. Credit: How People Choose to Pay,” found that while very little appeared to separate consistent credit card users from consistent debit card users in terms of income and total spending, cardholders who primarily use debit cards appeared to have lower credit scores and carry higher interest credit cards.The report’s authors suggested that the classification of predominant users of each card is firm enough that credit unions could find it useful to further segment their membership along those lines.Researchers Victor Stango, an economics professor at the Graduate School of Management of the University of California at Davis, and Jonathan Zinman, assistant professor of economics at Dartmouth College, observed all of the retail debit and credit card transactions of each individual, coming from individual checking and credit card statements. They looked at transaction dates and amounts and whether the individual used a debit or credit card in the transaction.The study used data collected by Lightspeed Research (formerly Forrester Research) as part of its comprehensive consumer survey system. The data the report used came from roughly 1,000 individuals for all of 2006.The data covered account and consumer-level information as well, including checking accounts with all the fees on those accounts. Researchers also looked at the fees and interest on the consumer checking accounts as well information about income and education but also credit bureau information such as FICO scores.“We also examine how individuals vary in their choices of debit versus credit. Do most people specialize, choosing the same method almost all the time, or do transaction characteristics dictate a mix for most people?” Stango and Zinman asked. “If someone uses a debit card for almost all his or her transactions during the month, does that mean he or she will continue to do so, or do people switch between intense use of one choice and intense use of another? Our findings are quite strong for these measures. Most people primarily use one type of card and do not change their status as a debit user or credit card user during the sample period.”In addition, debit card users tended to have lower credit scores and paid more for their credit cards, as much as 200 basis points more on average.“We do find evidence of behavioral differences between debit users and credit users; by our measures, heavy credit card users are more ‘responsible’ than heavy debit users. They have better credit, indicating a stronger history of financial decision making.”“This is evidence in support of the view that heavy credit users do not use credit simply because they are cash-constrained or otherwise in financial difficulty. They choose to do so, perhaps because they pay their bills in full and are cognizant that credit cards are cheaper than debit cards in economic terms,” the authors wrote.The relative cost of the two types of cards shows itself in fees, the authors found. Debit card users, as a total, spend more on fees than do credit card users-even accounting for finance charges on credit cards.“There are substantial differences in total fees,” the report said. “On average, credit users pay roughly $182 per year in fees across all of their accounts. Debit users and mixers pay nearly $500. This is a clear pattern; heavy credit card use is less costly because heavy credit card users avoid checking overdrafts, and they do not pay much more in credit card interest because they tend to pay their balances in full more often.”The authors found the chief culprit of those fees were overdraft charges. Debit card users over the course of the data sample spent $210.27 in overdraft fees, whereas credit card users paid $9.29 over the course of the sample.The report gave short shrift to the impact of rewards programs, citing other research to indicate such programs add only marginally to card value (one cent per one dollar charged) but not discussing previous evidence that rewards programs drive some degree of cardholder behavior.Finally, the authors reported that the degree of tenacity that credit card and debit card users clung to their different cards suggests that credit unions might find it useful to segment their membership according to those distinctions.“Perhaps most useful is the finding that across demographic segments, many consumers tend to rely on only one payment choice type,” wrote George Hofheimer, chief research officer for Filene. “This finding creates an opportunity for credit unions to broaden their thinking about how to segment their membership. Although credit unions currently segment members along demographic lines such as age and income, this report and previous research indicate that a behavioral approach to segmentation may be a promising approach for credit unions to consider.”“Payment choice seems to be an interesting segmentation candidate to consider. Testing this segmentation approach could lead to a deeper understanding of debit consumer needs and potentially translate into the next whiz-bang product in the financial services landscape.”–[email protected]

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