Citizens Bank has widely advertised its month-old debit rewards program leading into the holiday shopping season.

Retailers and financial institutions predict holiday spending will stay steady or increase this year compared to last, and they’re also noting a trend in how shoppers are paying for their purchases: Use of debit cards is on the rise.

In fact, as most surveys predict holiday spending will increase anywhere from 5 percent to 7.5 percent during the coming shopping season, use of debit cards for in-store purchases last year rose to its highest level since 2001, at 33 percent, the American Bankers Association said. Cash spending remained constant, also at 33 percent, according to the national trade group, while credit card spending fell from 21 percent to 19 percent during the same four-year period.

Debit spending continued to rise in 2006, the National Retail Federation reported last week in its 2006 Holiday Consumer Intentions and Actions Survey of 8,090 U.S. respondents.

In New England, the trade group reported, 34.1 percent of consumers intended to use debit more than any other method of paying for holiday gifts, compared to 39.1 percent nationally.

Portland, Maine-based TD Banknorth’s Director of Corporate Communications Jeff Nathanson said “convenience and acceptance” are probably driving the increase.

“Virtually every retailer accepts debit [as a form of payment],” he noted.

Local and regional banks are taking extra steps to capitalize on the trend by initiating rewards programs aimed at debit card users. They just have to select the “credit” option when they swipe their card at the point of sale, which means the consumer signs for the transaction instead of providing his or her PIN number, although the account is debited in the same way.

The debit card issuer earns more from a signature transaction than from a PIN transaction, but the cost doesn’t impact the consumer, Nathanson said. (However, ABA spokeswoman Tracey Mills noted that “some banks may charge a nominal fee if consumers use the PIN option.”)

Danversbank Public Relations Manager Priscilla Letorney, whose $1 billion-asset, Danvers-based employer introduced its Points2U program this month, said using the debit card with the signature option “enhances the customer’s experience, as they get more value from their Danversbank/MasterCard.”

Points2U users earn points toward travel, movie tickets and downloadable music.

Changing Dynamics
Similarly, Citizens Bank’s widely advertised, month-old debit rewards program, which also requires signature-based rather than PIN transactions, is intended to “give something back to our customers as a reward for what they’re already doing,” said Citizens Massachusetts President and CEO Bob Smyth.

They earn points toward restaurant and retail gift cards and charitable donations. Providence, R.I.-based Citizens, a commercial bank with 264 Massachusetts branches, also hopes to attract more customers through the bank-wide program, Smyth said, and it’s working. “We are way ahead of our goal.”

Customers are likely to spend more this holiday season, no matter how they pay, Smyth predicted, based on factors such as “lower gas prices, a better stock market and job stability.”

Banknorth’s Nathanson suggested that this year, “people are looking for a reason to have a festive holiday season.”

“For some people, the [mid-term national] election results make them feel there may be changes in the air around the war [in Iraq], and they may feel a little bit better about that. Then, you’re seeing retailers such as Wal-Mart announce price cuts to encourage people to come in,” he said.

Philadelphia-based Sovereign Bank, a $63 billion-asset institution with a strong foothold in the Bay State, doesn’t have any debit rewards programs currently, said the bank’s Boston-based Capital Markets Vice President Steve Andrews. Andrews nonetheless predicted that “higher wages and earnings, an improving stock market and falling gas prices” will contribute to increased holiday spending this year.

One rule of thumb is that “each penny decline in prices at the pump adds $1 billion in purchasing power,” he noted.

Fuel costs and the other positive factors will help offset “the loss of wealth from the housing slowdown,” Andrews predicted.

While Internet and gift card purchases could tip initial holiday shopping numbers toward the “disappointing” side of the scale for retailers, Andrews said, results will probably be revised higher as online orders and gift card redemptions get factored in following the holidays.

“We expect to see at least as many gift cards as last year, pulling the ‘shopping’ season into the New Year,” he added.

The Massachusetts Bankers Association, which posts an annual consumer shopping tips guide on its Web site (www.massbankers.org) every holiday season, has also noted more people using gift cards.

“They’re changing a little bit of the retail dynamic, so it’s become harder to predict whether the post-Christmas deals will be better,” said MBA spokesman Bruce Spitzer. “One possible impact would be fewer post-holiday markdowns, because retailers might think they can sell [merchandise] for full price on the gift card,” he explained.

MBA says using debit or other non-credit means of payment is often the smart thing to do, because debit transactions steer consumers away from high-interest debt and force them to stay within their spending means. But the association warns there’s one place consumers still might not want to use debit – in a restaurant, where the bank card often is temporarily taken out of your sight while your payment is processed.

“Some thieves have been known to attach ‘skimmers’ [devices that record card information] so that they can steal your card info,” the organization warns – and because a debit card is directly connected to a customer’s bank account, it’s more vulnerable.

“Perhaps a credit card would be better in this instance,” MBA notes.

Two consumer surveys released last week show that people polled about their holiday spending plans are slightly less optimistic than those who count on their spending dollars.

Nationally, 32 percent of consumers said they will spend less this holiday season, 15 percent said they would spend more and about half said they will spend the same, according to a survey by the Consumer Federation of America and the Credit Union National Association. The number of respondents who said they would spend much less than last year went from 13 percent in 2005 to 18 percent this year.

A Zogby Interactive poll, meanwhile, said slightly more than half (55 percent) of potential shoppers plan to spend the same amount this year as last. Younger shoppers were more likely to increase spending, while those aged 35 to 54, according to the survey, are “most likely to take a more cautious approach” to holiday spending.

That same age group, the survey said, was also most likely to say they were financially worse off than last year.

Of those polled by Zogby, 15 percent said they plan to spend more than $1,000 on holiday gifts this year and 28 percent said they would spend between $500 and $1,000. Those in the 50 to 69 age group and those who are married are most likely to spend greater amounts, the survey showed.

“When you add up shopping for a spouse, parents, children, grandchildren and other family and friends, it’s no surprise,” the survey report suggests.

Credit Union National Association Chief Economist Bill Hampel said his group’s experience with its annual survey is that “consumers tend to say they will spend less than they actually do.”

The National Retail Federation predicts total holiday spending will be $457.4 billion this year. Just 5.6 percent of shoppers have completed most of their holiday shopping to date, the survey reported, while the vast majority – 68.5 percent – have completed 10 percent or less.