Government figures show Americans are shopping again and that consumer spending up 2.2% so far this year, but with a difference.  Instead of putting their purchases on credit cards, they are paying with cash in the form of paper money or debit cards.

The Nilson Report (not to be confused with Nielsen) tracks payment systems and it says customers are already showing a strong preference for cash. Even though consumer spending is up, none of the four major credit-card companies have benefited from the increase.

According to the Nilson Report, Visa credit-card transactions were down 1.2% in the first half of the year, compared with the same period in 2009 while MasterCards were used for about 10.2% of all card transactions, also down. Discover transactions also dipped slightly. Only American Express reported unchanged card usage.

Consumers appear to be spending money they currently have, paying for purchases with a debit card or actual cash. The dollar amount paid with debit cards has grown 15% this year while spending on credit cards was up just 1.9%.

Debit-card usage is expected to grow 8% to 12% annually, according to the TowerGroup, which tracks bank cards.

James Brown, emeritus professor at the University of Wisconsin at Milwaukee and former director of the university's Center for Consumer Affairs told Smart Money that a lot of people "are leery of credit cards and don't want to fall back into debt - that's why you're seeing this migration."

Out of favor


There are other signs as well. Gift cards have fallen out of favor. After nine consecutive years of gains, gift cards are on the wane. Sales of gift cards are expected to drop to $86.2 billion, an 11% decline from their peak in 2007, according to

Why would gift cards suffer? Aren't they like cash? Not really. Shoppers want to avoid pitfalls like expiration dates and inactivity fees that can quickly erode a card's value. Even if you use a portion of the gift card, these inactivity fees can kick in if the rest of the card remains unused for at least 12 months.

Some consumers are selling their gift cards for around 10% to 20% less than face value to third-party sites like,, and Sales at are up 1,000% through October of this year compared to the same period in 2009. says sales have more than doubled through the middle of this year.

Dan Horne, professor of marketing who tracks the gift-card industry at Providence College, spoke to Smart Money about this trend. He says people would rather use the cash anywhere they like than be restricted to a specific store.

Within a few months, consumers could save up to 2.5% on most purchases by paying with cash. A clause in the financial reform bill allows merchants to discount items for shoppers who pay with dollars. And the Justice Department settlement last month with MasterCard and Visa allows retailers to discourage the use of rewards credit cards or other credit cards they deem expensive in order to avoid the high fees that card issuers charge when a store customer pays with plastic.

The result, according to Smart Money, could be a system of price tiers, where retailers offer different prices for each product based on method of payment - with cash the cheapest. Doug Kantor, counsel to the Merchants Payments Coalition, a coalition of retail trade groups, said retailers would "love to be able to offer discounts for cash” and that could soon happen.

To counter this shift to cash, credit-card companies are offering cash to encourage consumers to sign up and make purchases. Odysseas Papadimitriou, CEO of, which tracks credit card offers says that to qualify for up to $100 cash bonuses, consumers need a FICO credit score of at least 720. Of course, just like cash for checking account offers, credit card issuers expect to make thousands of dollars off these accounts. These cards are mainly offered to consumers who pay in full every month, represent a low risk of default, but who are heavy credit-card users who net credit-card issuers about 1% of the total purchase price each time they swipe their card fees that merchants pay the card companies, he says.

To get the $100 sign-up bonus, you'll have to give up cash, too, at least in the short term. With the Chase Freedom Visa card, consumers have to charge at least $799 in the first three months to get $100, and with the Discover More card, you'll have to charge at least $500 in the first three months for $100. And even then, most issuers post the money as a credit to your statement. Just like the old saying puts it, "you have to spend money to make money."