The government’s recent decision to temporarily expand the scope of tax deductions for users of check cash cards is expected to hit the local credit card industry, according to sources close to the matter.

Credit card issuers that are unaffiliated with local banks argue that the government policy favors bank-based financial groups that are able to promote their bank accounts ― through which most customers pay their credit card bills ― and their cash cards together.

“The government’s move (to promote debit cards over credit cards) will deliver a direct blow to companies that are focused on credit card businesses,” said a Hyundai Card official.

According to a revised policy outline, the government will offer an income tax deduction of up to 40 percent to debit card users who spend 50 percent more than in the previous year. The current ceiling is 30 percent. This additional benefit will take effect from this month to next June and be reflected in year-end tax adjustments in 2015 and 2016.

The preferential treatment for holders of debit cards, which allow users to use funds from their bank accounts, is in line with the government’s decision to reduce the level of household debt.

South Korea’s household debt reached an unprecedented 1 quadrillion won ($998 billion) in the first quarter, according to the Bank of Korea.

Last Thursday, the Ministry of Strategy and Finance announced the revised version of the government’s economic blueprint, which included a downward readjustment of the nation’s yearly economic forecast and a set of stimulus measures to revive the domestic market.

“The economy is improving, but the pace of recovery is still unstable,” said Kim Cheol-joo, the ministry’s economic policy director.

Debit cards are usually connected to bank accounts, so independent or nonbank credit card companies tend to focus on the credit card sector, Kim said.

Not all bank-based card firms were at ease over the government’s preference for debit cards, which yield much lower profits than credit cards.

According to the Credit Finance Association, the average commission rate for credit cards was 2.12 percent last year, while that for debit cards was 1.53 percent.

“As consumers increasingly use debit cards instead of cash in small-sum payments, we have to pay out a considerable amount in commission to the network system provider,” said an official of KB Kookmin Card, the credit card affiliate of KB Financial Group.

By Bae Hyun-jung (tellme@heraldcorp.com)