Use of debit cards must be encouraged
Korea has been one of the most generous countries for credit card users. The freedom has been a double-edged sword. It boosted consumption and reduced the black market. It has now become a burden for the economy and the people.
Regulators’ belated steps of curbing the unscrupulous issuance of credit cards are welcome but additional radical steps are necessary to prevent delinquents.
From now on, only adults aged 20 and above will be able to obtain plastic cards. New customers must have income exceeding their debts with a proper credit record.
Users of debit cards and prepaid cards will enjoy income tax deductions of up to 3 million won, or about 30 percent of the amount they spent. Users of debit cards will receive added points for their personal credit rating.
This is to help consumers live within their means as the money is taken out of one's bank account immediately when making a purchase. A new rule will automatically invalidate credit cards that remain unused for 17 months.
In a country with a population of 50 million, 120 million credit cards are in circulation. It means each economically active person has an average of five credit cards, the result of excessive competition among the 20 issuers.
In the United States, the United Kingdom and Germany, 42 to 92 percent of adults use debit cards. In Korea, it is only nine percent.
Issuers have distributed credit cards regardless of income and credit records. This has made many people credit delinquents. Consumers have 28 trillion won in card-linked debt, and 49 trillion won in installment purchases. Problematic is the uxorious interest rate of 16 to 20 percent on such borrowing.
Many consumers use multiple cards to pay off other card debt. This vicious cycle cannot continue indefinitely. Credit cards have helped delinquents delay bankruptcy.
Many young people without income, especially college students, have been living on credit. Many credit card users have also become victims of voice phishing.
The latest steps are necessary for preventing the situation from deteriorating as the economy is predicted to worsen next year.
Issuers face total ceilings in the amount of loans, the number of cards issued and their credit lines. They will face automatic supervision when they use more than 25 percent of their income for marketing. These regulatory steps are to check their overleveraged business expansion.
The measures have limits in curbing overconsumption. The maximum income tax deduction is 3 million won per debit card holder. Companies are reluctant to issue debit cards out of concern for reduced income.
The 2002 bursting of the credit card bubble jolted the economy. This mistake should not be repeated. The buy-now-pay-later habit has reached a dangerous level. Regulators alone cannot solve the current credit-card blues. Consumers must cultivate a habit of living within their means.