Credit cards trump cash on more benefits

“Do you have any of the credit cards listed here? You can get up to 20 percent discount,” a restaurant cashier asks a diner settling her bill, indicating a wall chart.

Kim Lee-soo, 22, shuffles quickly through a stack of cards in her bulging wallet. After passing on five or six of them, she finally finds one that matches the list and claims the full discount.

It’s a typical scene in Korea, where people use plastic to pay for everything from a highway toll to a single cup of coffee ― earning a variety of discounts and even income tax rebates in the process.

“I use credit cards most of the time and the small amount of cash I carry is only for emergency use,” said businesswoman Lee Chae-hwan, 38.

Office worker Moon Seon-young, 42, uses cash only in places like traditional markets.

The process began in 1999 as part of a government drive to fight corruption and tax evasion centred on the underground “black” economy. It gave tax breaks to encourage consumers to use credit cards and threatened tax audits for businesses which refused to accept them.

Now the country of around 49 million people has 117 million credit cards, almost five for each economically active person, the central bank says.

Card transactions were worth 517.4 trillion won ($475 billion) last year, a 6.6 percent rise on 2009, according to the Financial Supervisory Service.

Koreans’ usage of credit cards as a percentage of total consumption reached 54.9 percent in the first half of 2010 compared to 34.6 percent in the U.S. and 43.9 percent in Britain, Seoul’s Credit Finance Association says.

The bubble burst in 2003, with 3.7 million defaulters on loans and the government forced to step in to bail out card companies. The firms tightened measures when issuing cards but spending continued to increase.

Lavish rewards for cardholders are the main reason, according to Lee Jae-youn, a senior research fellow at the Korea Institute of Finance.

“In Korea, users don’t have to pay a membership fee, and rewards for using credit cards such as discounts in shops are incomparably large compared to those in other countries,” Lee told AFP.

Card companies also give holders “point cash”, a small percentage of each settlement, which is saved in the cardholder’s account and can be spent like cash.

Good infrastructure for electronic transactions in one of the world’s most wired societies, and the convenience factor, also swell usage.

“I use a credit card or debit card instead of cash because using a card raises my credit status and allows me to pay large sums in instalments,” said businessman Kim Chang-hwan, 28.

There are also the tax breaks. The government recently caused a stir when it announced it was considering dropping these this year. It later agreed to extend the policy for an unspecified period.

The tax breaks from card usage were worth 13 trillion won for 5.6 million people in 2009, according to tax service figures.

But Lee Jae-youn said even the expiration of the tax concession would not hit card usage excessively.

“Rewards by the credit card companies and convenience have accustomed people to use cards instead of cash, and this is not expected to change much even with the expiration,” he said.

The Credit Finance Association expects usage to expand further, but there is a downside. All those discounts must be paid for somehow ― sometimes in the form of higher overall prices.

The cost of discounts for using credit cards is passed on to consumers in ways such as an increase in overall price levels, Lee said. “And consumers may use credit cards too recklessly, possibly causing over-consumption.”

The Financial Supervisory Service said it will monitor the market and restrain excessive competition between credit card companies seeking to attract users. 

(AFP)