Twenty-something users, who are a key driver of private consumption, are turning their backs on credit.

"I have two credit cards and one debit card, but I use the debit card more frequently," said Lee Chang-won, 29, an office worker at a local car maker.

"With credit cards, it’s difficult to check and manage my spending every month. But with a debit card, I know immediately how much I spend a month, so there’s no risk of going beyond my budget."

Credit cards make up nearly half the private spending in Asia’s third largest economy, or about $ 380 billion. Debit cards represent just 3 percent of that amount, according to a credit card association and the Bank of Korea.

Buoyed by higher tax deductions for debit card spending in effect this year, debit card transactions rose 52.1 percent in the first half to 5.69 trillion won ($ 5.98 billion), according to central bank data. Credit card transactions, that qualify for smaller tax deductions, totalled 184.4 trillion won, down 2.7 percent from January-June last year.

Analysts expect the government to eventually remove tax deductions on credit card spending, as it gets tougher on consumer overspending and amid signs of overheating competition among credit card operators.

"The question is whether people will keep using credit cards after tax incentives are no longer around," said Han Jeongtae, analyst at Mirae Asset Securities. "Without the incentives, we have no reason to spend a lot through credit cards, while spending power is weakening."

The trend would be in contrast to Britain and China, where debit cards are popular payment cards even while the appetite for debt is expanding.

One South Korean bank estimated the number of its debit cards, now less than a third of credit cards, will overtake the latter in two years. But it would take longer for their value to dwarf that of credit cards.

Ku Yong-uk, analyst at Daewoo Securities, said the growing popularity of debit cards could dent banks’ earnings given that debit cardholders generate less fee income and were not entirely new customers.

"It’s just that credit cardholders are moving to debit cards, so that will not expand banks’ customer bases," he said.

Debit cards, introduced in South Korea 10 years ago, are issued to anyone aged over 14 who has a bank account, allowing them to directly transmit money to merchants. Most shops that accept credit cards also take debit cards, making it easier for buyers to switch, but their overseas usage is still limited.

Merchants are likely to embrace debit cards as the government could lower transaction fees to promote their use, a senior regulatory official earlier told Reuters.

If that happens, it would add to pressure on a local credit card market that faces consolidation after second-ranked Shinhan Financial Group agreed last month to pay $ 7 billion for credit card leader LG Card Co. Ltd. .

Most South Koreans already have more than three credit cards and regulators ban the hawking of credit cards on the street. They are also unlikely to raise the limit on cash advances to levels seen before the credit bubble burst in late 2002.

In July, customers in the 20-30 age bracket accounted for half the debit card spending at BC Card, or 234.8 billion won, while they made up just 8.3 percent of the credit card usage.

Banks have started offering discount services or bonus points for debit cards and supplementing overseas settlement functions, hoping customers will switch to credit cards later when their spending power improves.

Still, banks are pitching credit cards over debit cards as credit cardholders pay annual fees and interest for instalment purchases and card loans. Debt accounted for almost half of local household assets at the end of March.

The card loans also carry a double-digit net interest margin — much better than the average 3 percent at local banks.

"In terms of profitability, debit cards are not making big contributions to banks as most of their users are college students who deal in small amounts," said an official at Woori Bank, a unit of No.3 lender Woori Financial Group , which aims to more than double its share in the credit card market to 10 percent in the near future.