Shoppers leaving the plastic in their wallets

At Penney's, Hicks said that use of the company's store credit card was flat during the third quarter. The use of credit cards issued by other parties declined by a couple of percentage points as a percentage of overall payment, he noted, while cash was up by the same amount. Hicks said he hasn't seen a decline in credit card use in five or six years.

Scott Hoyt, senior director of consumer economics at Moody's Economy.com. said that Federal Reserve data has never shown an annual decline in credit card use, but he acknowledged that there isn't any solid payment data. Visa Inc. said that debit card growth is coming at the expense of cash and checks versus credit cards. And MasterCard Worldwide said consumers are increasingly paying with plastic — debit or credit — at the expense of cash and check, but didn't break out which portion was debit cards.

But many Americans are using cash or debit cards because they are being forced to. Laura Nishikawa, an analyst at Innovest Strategic Value Advisors Inc., a New York investment research firm, said that based on data from Visa, Master Card and American Express, the number of credit cards that consumers have fell 5 percent in the second quarter from the first quarter. That was mainly because consumers received fewer credit card offers, she said.

For years, consumers tapped into inflated home equity and used credit cards to finance their spending. Now those spigots are being shut off, and job losses are mounting.

"Consumers are really struggling to find sources of cash to make purchases," Hoyt said. "The rapid job losses are taking a big bite out of labor incomes. Obviously, it's making it much more difficult to borrow."

Online jewelry seller Blue Nile, which reported a 23 percent drop in third-quarter profits earlier this month, noted that deteriorating credit has hurt sales of jewelry priced from $5,000 to $25,000.

Doug Scovanner, Target's chief financial officer, told investors on Nov. 17 after disappointing third-quarter results that credit tightening across all U.S. card issuers "has already had a very important adverse effect on our sales, and I'm sure it will continue to do so."

Target is further tightening finance terms for its card holders as it confronts increasing defaults, and has promised investors that it will become even more stringent if credit conditions keep getting worse.

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But Target and other stores are finding themselves in the awkward position of wanting to tighten their credit terms to protect profits while at the same time realizing that such moves could depress spending, Arnold said. So many stores are dangling generous interest-free finance offers and offering deep discounts of up to 20 percent if you apply for a credit card, he said.

Target is offering a 10 percent discount for new credit card holders, while Bluenile.com has teamed up with Bill Me Later to let customers delay payments for 90 days on purchases of $250 or more.

But don't expect Smith, the entrepreneur, to bite. He's sticking with his $2,000 holiday budget, much lower than the $6,000 he spent last year on gifts. He added that he and his wife are setting aside the holiday money in a separate account so they won't go over budget.

And James Coyne, a 27-year-old full-time college student from Grand Forks, N.D., recently bought an engagement ring at a small jewelry store for $3,000 in cash because he doesn't want to rack up any debt.

"I have heard all these horror stories," said Coyne. "I save my money until I can afford it."

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