Household debt out of control

Household debt is a ticking time bomb for our economy. As debt surges, the interest burden on citizens is mounting. According to a nationwide survey released by Statistics Korea, a family paid an average 65,728 won ($58) in interest per month in 2010, up 16.3 percent from a year earlier. Interest payments have been on the rise since the office began keeping records of the payments in 2006.

These payments way heavy on low-income families. The same survey found that the growth in interest payment was highest at 28.1 percent among the lowest 20 percent income bracket of families with more than two members.

The survey only looked at housing mortgages and student loans; if loans for small businesses were included the amount of household debt and interest would be even higher.

The Bank of Korea estimates that household credit neared 800 trillion won as of the end of December. Interest would run as high as 40 trillion won when loan rates are estimated at 5 percent. Household deposits surged 50 trillion won last year to 414 trillion won. But income from interest was reduced because of the fall in deposit rates.

In an ideal world, a family would be able to afford payments on both debt and interest. Yet, in today’s economy, that is impossible for most. The debt ratio against disposable income has been climbing: It was 143 percent in 2009, up from 139 percent in 2008 and 136 percent in 2007.

Financial authorities synchronized their interest rates cuts with other countries to salvage the economy after the Wall Street-triggered financial meltdown wreaked havoc on the global economy in 2008.

The government in August last year also temporarily lifted the debt-to-income yardstick on authorizing loans for home purchases to help boost the real estate market.

Household debt has been out of control ever since, putting authorities in a difficult position when it comes to fighting inflation. The government would like to raise interest rates in order to stem the spike in consumer prices, but cannot easily do so for fear of adding interest burden to households that would slow down spending and the economy.

In order to prevent further damage to debt-ridden families, the government along with the Credit Counseling and Recovery Service should map out precautionary and contingency measures to address the imminent hazards of mounting household debt.