The taboo of credit card use in Europe

For as long as money has been around, people have been finding ways to borrow it. That might once have been as simple as a handshake agreement between family members or neighbors. These days, modern banking systems and technology have invented ways to make loaning money easy and straightforward. But even if you don’t have a mortgage or auto loan, you might have one of the most common modes of borrowing money on the planet: a credit card. 

Credit cards are used and accepted all over the world. The principle is pretty simple: Spend money with your card, then pay the amount back later. You can either repay the balance in full every month or let the debt accrue and pay interest on it. Credit cards can be risky, but they have advantages, too. With a credit card, it’s easy to pay in multiple currencies while traveling, make large purchases, or even build up good standing with a bank or credit bureau. But while some societies can’t get enough of paying with plastic, credit cards haven’t caught on in other places. 

Take Europe, where the majority of people still use cash. Prepaid and debit cards are very popular in countries like France, but credit cards are far less common across Europe than in countries like Canada and the United States. Strangely, statistics show that Europeans aren’t exactly debt-averse in other areas, despite their frugal reputation — and yet, credit cards just haven’t caught on. So, why is the use of credit cards so taboo in European countries? And is the door opening for more widespread credit card use?

This first term to know is “revolving credit,” which is a credit line that remains open even as you’re making payments towards it. In some countries, taking on this type of credit is an essential way to prove your creditworthiness — a.k.a. your ability to pay off your debts on time. In the US, for example, you build creditworthiness in part by opening and using a credit card. Paying off your credit card regularly is seen as essential for everything from renting an apartment to getting competitive rates on loans. In Europe, however, most countries either calculate consumer credit scores  differently or don’t have it at all. Let’s look at a few examples. 

In Germany, instead of building up trust with credit agencies by taking on credit, every resident of the country starts out with a credit score of 100. With any accumulating debts, the government-run SCHUFA credit bureau docks points. This means that there is no real advantage to sporting an AmEx — in fact, it could impact your credit score negatively. Spain has a different system altogether, focusing on the “negative” credit score. Their Risk Management Centre tracks any outstanding debts and can even blacklist some consumers from accessing loans for up to six years. 

France’s approach, perhaps appropriately, is based on relationships (with your bank, we mean). There, you gain access to loans or new credit applications by opening a bank account and building a lasting relationship with them based on trust. Want to switch banks? Then you’ll have to start the process all over again, as regulations don’t allow banks to share customer information among themselves.  

As you can see, each country has its own way for consumers to prove their creditworthiness — but very few involve opening lines of credit. Which begs the question: Why get a credit card in Europe?  

Let’s face it: Getting rewarded for spending money is a pretty enticing prospect. But if it sounds too good to be true, you might not have discovered the wonderful world of credit card points. Depending on where you live, credit card points and generous sign-up bonuses can win you everything from free flights to gift cards to cashback. In countries where these rewards are common, customers are incentivized to open multiple credit cards. 

Credit card rewards, however, aren’t exactly free. They’re funded by the fees (mostly “interchange fees”) the merchant pays the issuing bank for processing the card. For banks to keep earning income on those fees, they pass earnings on to the customer in the form of rewards.

In Europe, however, EU regulations now cap the amount that issuing banks can charge merchants. The same law also limits the reward amounts that they can offer customers — which can’t be higher than what they’re earning from merchants. All of this means that banks don’t have much to gain by offering credit cards to their customers. And while credit cards offer some convenience in daily life, the low rewards and perks aren’t very exciting for consumers, either. 

Credit card aversion may come down to a simple preference for cash. A recent study by the European Central Bank found that cash was the most frequently used payment method at the point of sale in the eurozone, used in 59% of transactions. Cash was also accepted at 95% of establishments.  

It’s worth focusing on some hard data from Germany here, where cash remains the proverbial king. After World War II, cash was seen as a kind of equalizer, establishing a level playing field for those who couldn’t access more sophisticated financial products — and the trend has stuck. According to a survey by the German Bundesbank, 58% of all payments in Germany were made in cash, seconded only by debit card payments. When asked why they preferred cash, 55% said it was the anonymity of cash that made it so appealing. 

This is important. It’s true that opening a credit card requires you to share your data with an issuing bank, who will then explore your background in order to offer you a line of credit. Countries in the former Soviet Union, given their history of government surveillance, tend to be more suspicious of handing over their data. Today, this extends to giving their data to companies: The Bundesbank survey found that 95% of respondents said they were unlikely to hold a current account with Amazon, Facebook, or other online companies. 

This preference also extends to the regulatory sphere. In general, Europe has strong data privacy laws that reflect this cultural preference — it’s part of how the EU protects its consumers. Furthermore, in 2022, the European Parliament instituted new laws to protect consumers from taking on too much debt, including placing limits on advertising and giving borrowers more power to withdraw from loan agreements.

Despite the strong regulations, Europeans are still racking up plenty of debt — just not with credit cards. As of January, 2023, household debt in Europe was 57.4% of GDP. Denmark has the highest rates in all of Europe, at 228% of the average household’s disposable income, while Slovenia, Hungary, and Poland were among the lowest.  The most common types of debt include loans, specialty mortgages, and special credit. And the rate of consumer borrowing is also climbing — it’s up to 63% in Greece, followed by Poland (41%) and Italy (40%). 

This dramatic rise in the use of consumer credit is mostly affecting young people. Although they aren’t racking up credit card debt, many consumers are using buy-now-pay-later financial products to free up their cash and pay in installments. So, rather than relying on revolving credit, Europeans tend to take on consumer debt on a purchase-by-purchase basis. A Finance Watch study on the EU consumer credit market suggests that these credit products tend to be under €200 per purchase and are used primarily by lower income customers. 

This rise in consumer credit may be impacted by changing attitudes toward debt, but it’s also fueled by high inflation and an increasingly destabilizing cost-of-living crisis. Add high unemployment, and you’ve got a situation where many consumers have to take on debt to make ends meet. 

Despite a hesitancy among consumers to choose credit over cash, things may be changing on the continent. The COVID-19 pandemic saw a massive increase in contactless payment in Europe, even for small purchases. And credit cards, mainly used to make large purchases, accounted for 10% of turnover in Germany last year. Both on- and offline, more shops accept cards than ever before, and some retail chains like Ikea are even offering their own credit or payback cards.

However, consumer interest alone may not be enough to drive a shift to a more card-friendly society. Most governments, particularly in southern Europe, cap the amount of interest issuers can charge consumers. Meanwhile, friendly overdraft rates in countries like Germany mean bank customers can borrow money quite cheaply — at least for now.

So, what does the potential future of credit cards in Europe look like? There are two main pieces: more customer-friendly finance products and more tech-savvy credit score reporting. If demand for these increases, it could lead to an uptake in credit card adoption and use over the long term. With growing interest across the EU in contactless payments, consumer credit, and on-demand services like online shopping and ride sharing, credit cards could be poised to take off. But don’t spend all your banknotes just yet — it may be slow coming. 

Whether you’re a card or cash person, N26 is built with your needs in mind. Open a free bank account and get a virtual debit Mastercard to make purchases as easy as 1-2-3. And if you have a soft spot for banknotes, customers in selected countries across Europe can use CASH26 to deposit or withdraw cash at retailers — no need to search for an ATM. 

If you want to stay on top of your budget, try one of our premium accounts instead. You’ll get access to 10 Spaces sub-accounts to save for your unique goals. Need free ATM withdrawals abroad? Check. Want to split a purchase and pay it off over time? We’ve got you — that’s N26 Installments. So, why wait? Compare accounts now and start loving your bank.