by Joseph Kenny | 11/13/08

As more US consumers are facing difficult financial circumstances because of the economic downturn, debit cards are taking a front seat to credit cards. The reasons are often practical but may become increasingly necessary as banking institutions tighten the supply of available credit.

Unlike credit cards, which tape into a prearranged line of credit, debit cards drawn their funds from the owner's checking or savings account. Rather than using money that you do not really have, as with credit cards, when you use a debit you are using only what you have. With debt a serious problem in bad economic times, people are more sensitive to making budgets and sticking to them. The debit card is an excellent budget tool.

The Nilson Report, a credit card industry newsletter, reported that purchases made using a debit were expected to increase as much as 13% throughout the course of 2008. The percentage of credit card transactions was only expected to rise 3%.

The debit card industry is going through a transformation that is making it a comparable option to traditional credit cards. Where many credit card users still prefer their old VISA or MasterCard because they offer great incentives like frequent flier miles, new policies issued by debit card issuers are attempting to create competition. So-called loyalty programs are being issued by the card companies to encourage new sales of debit cards.

For instance, MasterCard has recently established a new savings program that give debit users access to exclusive luxury brands like Armani and offers from retailers like Target and Home Depot.

Another area where next generation debit cards is picking up is with those people who have been overlooked by other card issuers. There are approximately 80 million people in the United States that do not have any sort of bank or credit account. Similarly, other banks have developed programs to offer special prepaid debit cards to those on fixed incomes or using Social Security. In these cases, the money is deposited directly to the cards.

Debit cards are more widespread now because the issuers are taking an aggressive approach to marketing to produce some sort of profit in an uncertain economic environment. Debit cards are poised to replace credit cards in many areas that have been traditionally their sole exclusive domain.