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Limit credit-card loans, help debt restructuring

Published: 30 Sep. 2024, 19:35

Loans based on credit cards, including cash advance, have reached all-time high, which underscores the gravity of the financial squeeze being experienced by Koreans. Individuals denied by banks are forced to turn to easy yet expensive credit to survive the sluggish economy and the high inflation-and-interest rate environment. But after setting foot into convenient funding, people can enter a never-ending cycle of debt.

According to data from the Financial Supervisory Service, the balance in credit-card loans reached 44.66 trillion won ($34.24 billion) as of the end of August, the largest-ever since compiling data from 2003. Worse, the delinquency rate was 3.1 percent as of the end of August, surging from 1.9 percent at the end of 2021. The deferred payment amounted to 1.37 trillion won as of the end of August, the largest since 6.06 trillion won in 2003 after the credit card bubble burst and 1.99 trillion won in 2004.

The jump in plastic card-based credit sets off loud alarms about the economy. It implies that the weaker part of the economy is worsening — and the subsequent potentials of financial risk. People are turning to credit card issuers for immediate funds because they are turned away from banks and secondary lenders. The funds are charged with heavy interest — 14 to 15 percent per annum on average. Those resorting to credit-card loans could be borrowers from multiple institutions and lack affordability to pay off their debt. In other words, they are sinking deeper into the debt spiral.

In fact, many clients are choosing to declare bankruptcy after hitting rock bottom. According to data from the Credit Counseling & Recovery Service, the accepted debt reorganization cases reached 115,721, already nearing 70 percent of last year’s record high. Those aged 60 and older with a small fixed income made up 14.8 percent of people who are bankrupt.

The government and financial authorities must curtail the credit line through deleveraging and debt restructuring efforts to stop the debt vicious cycle from causing financial risks. Systematic assistance should be offered to heavily-indebted people so that they don’t fall into deeper danger. The personal credit reorganization act, which will take effect on Oct. 17, must serve its purpose of protecting those outside the legal boundary without stoking moral hazard.

Financial authorities must closely monitor credit card issuers still engaged in loan practices for profit-making so as to offset their decreased income from their reduced transaction fees if the financial authorities don’t want to see another credit card crisis devastate the market.