[Viewpoint] Urgent Policy Response Needed as Demand for Revolving Services Surges

Seo Ji-yong, Professor, Department of Business Administration, Sangmyung University

Recently, the outstanding balance of revolving services offered by credit card companies has surged. The revolving service allows consumers who lack the capacity to fully repay their card bills to carry over a portion of the payment to the next billing cycle. As of March this year, the revolving balance of seven major domestic credit card companies increased by 16.5% compared to the same period last year. This carried-over amount is more than 24% higher than the level before the COVID-19 outbreak in 2019.

The advantage of the revolving service is that it reduces the immediate repayment burden on card users, helping consumers secure funds and contributing to the establishment of future financial plans such as debt repayment. However, the problem with the revolving service is its excessively high fee rates. As of the end of March this year, the maximum fee rate for revolving services is 18.5%, approaching the legal interest rate ceiling of 20%.

Despite the high fee rates, the recent surge in revolving service usage indicates a deterioration in household repayment capacity. Additionally, credit card companies are increasing their provisions for bad debts in preparation for potential credit deterioration due to the rise in revolving service balances. The amount of bad debt provisions in the first quarter of this year increased by 18.3% compared to the same period last year.

So, what is behind the rapid increase in revolving service usage? The main factor is the strengthened Debt Service Ratio (DSR) regulations implemented from this year. The tightening of regulations on card loans, which are real-demand loans for low-credit borrowers, has been advanced ahead of the original schedule as part of efforts to curb household loans, increasing the risk of credit deterioration in the credit card market. In other words, since card loans have been included in the DSR regulations starting early this year, the use of card loans has decreased, while the revolving service balance has increased. This is because payment-type revolving services are not included in the DSR. Low-credit households struggling to secure funds are understood to be compelled to use revolving services despite the high fee rates.

Meanwhile, the significant increase in financing costs for financial consumers due to the use of revolving services suggests that household financial conditions may worsen further in the future. Last year, the implementation of the total loan volume control led to a sharp rise in loan interest rates, significantly increasing borrowers' interest burdens. Now, the early application of DSR regulations to card loans is deepening household financial distress due to the high financial costs associated with revolving service usage.

Above all, the increase in revolving services indicates a decline in the quality of household debt. While credit card companies are proactively managing risks by increasing bad debt provisions in response to the rise in revolving services, the financial authorities’ measures seem to lag behind the responses of the card companies. Recently, financial authorities appear to be paying attention to the rapid increase in revolving services and are contemplating countermeasures. Financial policies must be carried out with foresight and prudence. It is regrettable that the side effects of total household loan volume regulations and the early application of DSR to real-demand loans by card companies ultimately fall on ordinary citizens.

With the new government inaugurated, the policy direction of financial authorities seems to be shifting from solely tightening regulations to easing them. Having experienced a series of financial crises such as the IMF foreign exchange crisis, the credit card crisis, and the global financial crisis, financial institutions have significantly improved their risk management capabilities. To expand consumer convenience services and enhance risk management capabilities, financial authorities should provide bold policy incentives, including preferential support related to licensing rights necessary for financial institutions’ diverse business expansions.

Seo Ji-yong, Professor, Department of Business Administration, Sangmyung University