Will credit card loan be an economic time bomb?

Will credit card loan be an economic time bomb?. July. 28, 2018 07:34. .
South Korea’s credit card loans are seriously on the rise. The country’s credit card loan balance surged to an all-time high of 26.3 trillion won in last March from 24.9 trillion won at the end of last year. Concerns are rising since credit card loan is a high-interest loan mostly used by vulnerable members of society, such as the low-income bracket and small business owners, who are struggling in the stagnant economy.

A sharp increase in credit card loan is the result of the government’s regulations on lending, which was supposed to work as a countermeasure against increasing household debt and real estate speculation. Underprivileged people, who have low loan limits or personal credit ratings had no other option but to resort to credit card loans because mutual savings banks, investment banks and commercial banks all raised their threshold for lending. The rate at which household debt is increasing has slowed, but lending from credit card and capital companies is increasing.

This “balloon effect” has been anticipated when regulators have tightened controls on lending. But it is doubtful whether the government has thoroughly reviewed about its adverse effects. The default rate of credit card loan rose to 1.96 percent in March this year from 1.80 percent late 2017. This suggests that increasing number of debtors in the low-income bracket is struggling with high-interest rates. There are also chances that the debt will snowball since many credit card debtors borrow money from a credit card company and pay off to the other to avoid overdue payment. Increase in credit card demand has given rise to illegal sales activities, where customers’ personal information is traded. But financial regulators are sitting on their hands. They should strengthen the monitoring of and supervision on credit card companies and figure out the number of people holding multiple debts.

Banks, which earned 14 trillion won in profit in the first half of this year from interest, are also the ones to blame. They should be careful in determining loan eligibility by thoroughly assessing personal credit rating rather than just demanding collateral for a loan. Financial regulators and banks should put their heads together and come up with loan products with moderate interest rates to prevent people from resorting to credit card loans with high interest rates. Every year, 2-3 million credit cards are newly issued. As of this year, Korea will see over 100 million credit cards issued. Our efforts to control the rate at which household debt is increasing will be in vain if credit card loans become the time bomb of our economy.