[Initial Moment] Credit Score Traded for Loan Interest Rate

[Asia Economy Reporter Sim Nayoung] These days, self-employed communities on portal sites are abuzz with sharing "ways to lower credit scores." Typically, people with credit scores in the high 700s aim to reduce their scores by several tens of points. The questions and methods vary widely. "Bank loans are blocked, card loans are blocked. I have 400,000 won left in cash service; is it better to take it separately or all at once?" "My score is 782 now, but even if I take a card loan, the score doesn't drop anymore. What is this nonsense?" "Card delinquency is the answer. After two months of delinquency on two cards, my score dropped sharply from 756 to 250." Dozens of such posts appear daily, followed by numerous comments. It’s heartbreaking to think how desperate and frustrated people must be to go this far.

There is a reason why self-employed people are more concerned about their credit scores than their business. Starting from the 20th, the second application period opens for loans for small business owners in traditional markets. The Small Enterprise and Market Service lends up to 30 million won at a fixed annual interest rate of 2% to low-credit self-employed individuals with credit scores of 744 or below (based on NICE Information Service). The 40 billion won budget for the first application last month was quickly exhausted. This month and next, an additional 20 billion won each will be available, and self-employed people are fiercely competing for it. Bank loan interest rates these days are around 5-6%. By lowering their credit scores, they can reduce interest costs by about 100,000 won per month. For self-employed people who are even short of a single 1,000 won bill, it’s natural to think "not taking it would be a loss."

This topic of deliberately lowering credit scores is not new. Two years ago, the Ministry of SMEs and Startups offered loans with an interest rate of 1.5% for those with credit scores up to 775. At that time, many self-employed people traded their credit scores for better interest rates. During the height of COVID-19, bank clerks even secretly shared tips on how to lower credit scores to help with loans. At this point, it can be called a chronic problem. When asked about solutions, officials only responded, "There’s nothing we can do." "Even if the credit score threshold is lowered to 600, the same problem will occur. And it’s not possible to keep the criteria secret. This time, people with scores below 775 receive many benefits, so that should be valued highly."

There is no disagreement that this policy started with good intentions. It is also true that no policy can be perfect. However, knowingly allowing side effects to persist is government neglect. The more such products appear, the more the overall credit scores of self-employed people decline. The budget for financial support for the self-employed is always limited. As the number of low-credit individuals increases, the support threshold will inevitably drop, causing self-employed people to lower their creditworthiness further. It is a vicious cycle. Meanwhile, the risks that financial companies must bear only increase.

Recently, Financial Supervisory Service Governor Lee Bok-hyun said at a press conference, "(Banks’ support policies for the self-employed) are packaged collectively, so there are banks with strong will and others relatively less so, which means a competitive environment has not been created. From the first quarter of this year, we will carefully monitor whether the support is effective and which banks performed well, as this can become an ESG indicator for banks." The scope of supervision should not be limited to banks. Policies must also be reviewed. It is time for the National Assembly, which oversees the government, to step up and "carefully examine which ministries have the will, which have performed well, and what the side effects are."