How the pandemic has accelerated the demise of credit cards, in 4 charts

The credit card has a long-standing relationship with the American consumer. It’s certainly come a long way since the launch of Diners Club — the world’s first consumer-facing credit card company — in 1950, and American Express’ issuance of the world’s first plastic card in 1959.

But after decades of dominance in the U.S., the credit card may finally be losing its hold over American finance. The move away from credit cards seems to have accelerated over the last year and a half, thanks largely to (you guessed it) the pandemic and the resulting economic uncertainty, as well as the growing popularity of alternative payment options such as Buy Now, Pay Later.

Customer satisfaction with credit card issuers has seen a visible decline this year, owing to increasing financial uncertainty, combined with factors such as high interest rates, shrinking credit limits, and misdirected rewards programs. Credit card issuers are struggling to meet the rapidly evolving expectations of customers through the pandemic.

“The industry missed the mark on supporting customers’ changing needs when many were facing significant financial challenges,” said John Cabell, director of banking and payments intelligence at J.D. Power. “Whether through tightening credit limits at the very moment when customers were most reliant on their cards for short-term funding, or through a lack of customer service accessibility, credit card issuers experienced declines in overall satisfaction, trust, and brand perception this year.”

New research by payments firm GoCardless also shows that a growing number of U.S. consumers – particularly Millennials and Gen Z – are slashing their credit card use in favor of other payment methods.

Americans want to cut down on their credit card use

GoCardless recently conducted a study that looks at how and why the pandemic has accelerated the move away from credit cards, and what forms of alternative payment are gaining popularity. The study found that over three-quarters of Americans are now looking to decrease their use of credit cards, and a similar proportion say they prefer to use a debit card over a credit card to make purchases.

American enthusiasm for credit cards is waning

American enthusiasm for credit cards has dropped in the aftermath of Covid, with most consumers saying they are less likely to make credit card purchases now than before the pandemic.

There’s a major generation gap here. Baby Boomers remain somewhat loyal to credit cards: just 39% say they are less likely to use them now than before the pandemic. Yet, almost twice as many Millennials (74%) and Gen Z (76%) have reduced their credit card usage through the pandemic.

But what explains the declining popularity of credit cards among different generations?

Why Americans are losing interest in credit cards 

In general, Americans are cutting down on their credit card use because of the economic uncertainty brought by the pandemic. Almost half of the respondents say they are afraid of falling into a debt trap. Over a quarter of respondents also express concerns about paying off their monthly balances and managing minimum payments.

The reasons why people are less likely to use their credit cards vary considerably by generation. For Baby Boomers, the primary motivator seems to be debt avoidance (59%) – something that Gen Z seems less concerned about (39%). Meanwhile, the fear of overspending and impulsive purchases is much higher among Gen Z (44%) as compared to Baby Boomers (32%).

Young Americans are abandoning their credit cards for BNPL

Young consumers seem to be especially wary of the downsides of excessive credit card use. Almost 90 percent of Millennials and Gen Z prefer using a debit card to a credit card, as compared to around half of Baby Boomers.

Younger generations have also developed a distinct preference for alternative forms of payment, such as Buy Now, Pay Later. Compared to Boomers (43%), Millennials and Gen Z are twice as likely (87%) to choose the services of an installment payments provider such as Klarna or Affirm over a credit card.

The declining popularity of credit cards among young shoppers could be an early sign of a permanent shift in consumer preferences. As the economic clout of Millennials and Gen Z increases over the next few decades, credit card use could see a further decline against the rising popularity of competing options like BNPL.

Hiroki Takeuchi, co-founder and CEO of GoCardless, says the pandemic put people in a tough spot financially, which accelerated the move away from credit cards. But this move is part of a much larger trend, particularly among young U.S. consumers.

“Alternative payment methods such as Buy Now, Pay Later are booming, and Americans are also discovering the benefits of account-to-account payments such as ACH debit, which have been popular in other parts of the world for years,” said Takeuchi.

“Although credit cards dominated the U.S. market for decades, it’s clear that a seismic shift has started taking place, and they will likely become obsolete in a generation or two.”