Self-inflicted Credit Score Damage to Get Loans... The Harm Caused by Total Loan Volume Regulation

Self-Employed Citizens Lower Credit Scores by Taking Card Loans and Seeking Loan Sharks
Distortion Arises from Total Loan Cap and Preferential Policies for Low-to-Mid Credit Borrowers
"A World Where High Credit Borrowers Deliberately Become Low Credit"

Due to the rapid increase in COVID-19 confirmed cases, the government is considering whether to suspend the phased recovery of daily life (With Corona). On the 28th, the streets of Myeongdong, Seoul, were quiet. Photo by Moon Honam munonam@

[Asia Economy Reporter Kim Jin-ho] Kim Dae-hee (47, pseudonym), who runs a chicken restaurant in Seoul, is deliberately lowering his credit score to receive a government-supported loan. This is to qualify for the "small business loan for low-credit borrowers." Unable to pass the heightened bank thresholds due to stringent total volume regulations, Kim is in desperate need of this loan. After reading a post titled "How to Lower Your Credit Score" on a self-employed community, he has been following the advice exactly. Although he lowered his credit score by 100 points through multiple cash advances, he needed to reduce it by another 30 points to qualify, eventually turning to private lenders. Kim lamented, "It's so absurd that I have to lower my credit score just to get a loan that it makes me laugh."

As the loan freeze continues due to the financial authorities' total volume regulations, a clear "distortion phenomenon" is emerging in the market where financial common sense is breaking down. High-credit borrowers are intentionally lowering their credit scores to access loans. This side effect has arisen because, unlike high-credit borrowers who are blocked from loans, the loan thresholds for low- to mid-credit borrowers have significantly lowered.

According to the financial sector on the 7th, inquiries about whether credit scores can be temporarily lowered by taking loans from credit card companies or private lenders have been increasing recently. Several posts containing such inquiries and methods to lower credit scores are being uploaded daily on major self-employed communities.

The increase in people wanting to lower their credit scores is to qualify for loans targeted at low-credit self-employed individuals provided by the government. Since the 24th of last month, the government has been accepting loan applications to support low-credit self-employed people struggling due to COVID-19. To use this product, the credit score must be 779 points or below (grade 5) based on NICE Information Service at the time of application. Borrowers can receive up to 20 million KRW at a fixed annual interest rate of 1.5%.

Consequently, self-employed individuals urgently needing lump sums have started lowering their credit scores to meet the loan conditions. Given the low interest rates and high limits, there is no reason to refuse. Methods to lower credit scores vary, from repeatedly taking cash advances or delaying utility payments to even knocking on private lenders' doors when their loan limits are maxed out.

In particular, self-employed communities contain tips advising that credit scores drop more slowly when using cash advances, so it is better to use card loans. These posts recommend applying for a loan once the credit score reaches the qualifying level through card loans, then withdrawing the loan approval to recover the credit score. This exploits the loan application withdrawal right activated by the Financial Consumer Protection Act.

The extreme measures taken by self-employed individuals to deliberately lower their credit scores are largely due to the financial authorities' stringent "loan tightening." Considering that loan thresholds are closing not only at banks but also in the secondary financial sector due to total volume regulations, this loan is seen as their "last hope."

The distorted market phenomenon favoring low- to mid-credit borrowers rather than high-credit borrowers is also closely related to this situation. Major banks and internet-only banks have mostly lowered unsecured loan limits for high-credit borrowers to 50 million KRW, while granting up to 100 million KRW limits to low- to mid-credit borrowers.

It is also reported that unsecured loan interest rates for salaried workers are sometimes higher than those of policy-based financial products for low-income earners. This means that people with higher credit pay more interest than those with lower credit. A financial sector official said, "Even high-credit individuals have fewer places to borrow money, causing these side effects," and criticized, "The situation where high-credit borrowers deliberately become low-credit borrowers is incomprehensible by financial common sense." He added, "The overly comprehensive loan regulations combined with preferential policies for low- to mid-credit borrowers have created market distortions."