[The High-Interest Trap] High-Interest Products Surge Amid Card Loan Regulations... "Interest Rate Reduction Should Also Be Considered"

(Part 2) Balloon Effect of Cash Services Increasing Due to DSR Regulation... Revolving Credit Also Surges Amid Continued Economic Downturn

[Image source=Yonhap News]

[Asia Economy Reporters Yu Je-hoon and Bu Ae-ri] Office worker Kim Hyeri (32, female), who mainly uses credit cards for daily expenses, experienced a setback after being enticed by credit card companies' revolving payment advertisements. At first, she thought it wouldn't be a burden. Although the interest rate exceeded 10%, she could postpone the burdensome card payments by paying less than 100,000 KRW monthly. The problem started there. As the payment amount seemed to decrease, she hesitated less in spending. Initially, she set the minimum payment ratio at 50% of the outstanding balance, but as this ratio decreased, after a year, her credit card debt had accumulated to 7.7 million KRW.

The reason credit card companies are expanding the operation of high-interest products such as partial payment amount rollover agreements (revolving service) and short-term card loans (cash services), despite public criticism, is attributed to deteriorating profitability. With long-term card loans (card loans) included in the borrower-specific total debt service ratio (DSR) regulations aimed at curbing household debt and intensified loan competition, companies are seeking new revenue sources.

According to the industry on the 12th, despite regulatory warnings from supervisory authorities, the balance of credit card companies' revolving services continues to increase. According to the Credit Finance Association, as of the end of August, the revolving payment balance of seven major domestic credit card companies (Shinhan, KB Kookmin, Samsung, Hyundai, Lotte, Woori, Hana) was tentatively estimated at 6.81 trillion KRW, up 2.2% (144.9 billion KRW) from the previous month.

Revolving payment is a financial service where part of the credit card bill is paid first, and the remaining amount is deferred to the next month. As of July, the average cash service interest rate of the seven major credit card companies was about 17.55%, approximately 4.68 percentage points higher than the average interest rate of long-term card loans (12.87%) during the same period. Especially, vulnerable borrowers with low credit scores often use it at rates close to the legal maximum interest rate (20%), making it a typical high-interest trap.

The use of cash services, which serve as a quick financial outlet for low-income people, also increased by about 1 trillion KRW in the first half of the year. Cash service is a service where credit card companies lend cash within the individual's credit card limit. Unlike long-term card loans, the loan amount must be repaid on the upcoming card payment date, so the repayment period is about one month. The average interest rate for cash services also ranges from 14.22% to 18.35%, exceeding that of card loans.

As card loans became subject to borrower-specific DSR regulations, credit card companies have focused on cash services and revolving payments to recover profitability. Since January this year, for borrowers with total loans exceeding 200 million KRW, the annual principal and interest repayment amount cannot exceed 40% of annual income (50% for secondary financial institutions), and from July, the regulation target expanded to borrowers with total loans over 100 million KRW. According to the Financial Supervisory Service, the amount of card loan usage in the first half of the year remained at about 25.8 trillion KRW, down 10.7% (3.7 trillion KRW) from the previous year.

On the other hand, cash services and revolving payments are relatively free from such loan regulations. Credit card companies have also strengthened related marketing. According to data received by People Power Party lawmaker Choi Seung-jae from the Financial Supervisory Service, the seven major credit card companies spent 11.97 billion KRW on promoting and advertising revolving services from 2019 to August this year. By year, the spending showed an increasing trend: 2.248 billion KRW in 2019, 3.041 billion KRW in 2020, 3.932 billion KRW in 2021, and 2.686 billion KRW accumulated from January to August this year.

Recently, marketing has decreased due to warnings from authorities, but the upward trend continues due to strengthened regulations and worsening economic conditions. An industry insider said, "Although supervisory authorities have issued warnings about revolving services and marketing has decreased, usage is actually increasing," adding, "This ultimately means that more consumers are feeling their payment capacity is limited."

The supervisory authorities plan to implement strengthened regulations related to revolving payments starting this November. Specifically, these include ▲ establishing a revolving payment explanation booklet ▲ introducing customized explanation procedures by channel (face-to-face, telemarketing) ▲ instituting a happy call for revolving contracts via telemarketing to elderly customers ▲ disclosing comparisons between loan product interest rates and revolving fees ▲ and differentiating minimum payment ratios.

Kim Deul, head of the Financial Justice Solidarity, said, "Cash services are increasing among borrowers blocked by DSR regulations, and revolving payments are increasing among borrowers with reduced repayment ability," adding, "If this continues unchecked, vulnerable borrowers could face crisis situations, so measures such as lowering interest rates seem necessary."