Wave of sour loans on horizon as card users roll over debt

About one million revolving debt credit card holders are at risk of defaulting on their repayments, stoking fears of another chronic debt debacle that could weigh on the economy as jitters over household debt remain sky high, industry sources said yesterday.
Revolving credit allows borrowers to keep rolling their balances over to the following month until they are fully paid off, as long as they pay a minimum installment of between 5 and 10 percent each month.

According to data by the financial watchdog, 2.9 million people hold credit cards under these terms.

However, market watchers argue that taking out loans on this basis was a mistake for many as companies charge customers exorbitant interest rates of between 20 and 30 percent for the privilege of having their debt roll over.

Those who fail to meet their ultimate repayment deadlines become automatic credit delinquents as there is no grace period and can see their credit ratings plunge, according to financial regulators.

The delinquency rate for borrowers who subscribe to the revolving credit system stood at 3.1 percent last month, higher than the average general rate. The outstanding debt per person stood at a mean 2.1 million won ($1,773).

“A lot of defaulters have experience of using one card to pay off another, until that becomes untenable and they end up filing for bankruptcy,” said an employee at a counseling service for credit card users who have got out of their depth.

In a move to put a lid on sour debt, the financial regulator has been looking into raising the minimum payment for revolving debt-based loans and lowering the interest rate, as well as capping the credit line.

“Most of the customers who rely on this service from credit card firms have mid-to-low credit ratings,” said an official at the financial authority.
Meanwhile, separate industry data showed that the card firms raised their interest rates for cash advances and card loans during the second quarter, with top player Shinhan Card upping the rate by 0.04 percentage points to an annual 23.35 percent.

The average net profit of local credit card companies surged 21 percent on-year in 2011, with earnings from cash advances and card loans increasing 24 percent, according to the Korea Credit Finance Association.

Revolving services and card loans have already become a vital source of income for local credit card companies.

Credit card firms defended their policies as a fair way of managing risk.

“We charge relatively high interest rates because most of our customers using the revolving service, or taking out card loans and cash advances, have lower credit ratings,” said one employee at a local credit card firm.

By Kim Mi-ju, Yonhap [mijukim@joongang.co.kr]