Credit cards may be next trap

By Kim Tong-hyung

Fears that the banking system is facing a credit card time-bomb were underlined as official figures showed the country’s credit card swelling dramatically due to risky borrowing by desperate cardholders.

According to the Credit Finance Association (CREFIA), Koreans collectively swiped enough to owe 105.3 trillion won (about $97.2 billion) to card firms in the first three months of the year, representing a more than 14 trillion won, or 16 percent, annual increase.

The spike was explained by the higher frequency at which financial companies have been doling out the plastic as they engage in an intensifying battle for credit-card supremacy. However, outsized growth come at the cost of credit quality, as worries rise over the mounting bad debt piled up by an increasing number of low-income earners depending on their cards for cash advances.

At the end of last year, the number of cards issued by credit card firms stood at 116 million, which roughly comes down to 4.7 cards per person as Korea’s economically-active population was then measured at 24.75 million. This is slightly more than the 4.6 cards that were in the average wallet in 2002, the last time a credit card-related meltdown liquefied the country’s financial stability.

The credit card crisis prophecy arrives while the country struggles to cope with the historically high levels of household debt, which at around 1,000 trillion won is a near equivalent to an entire year’s gross domestic product (GDP).

Critics blame the reckless operations by credit card firms that issue more and more cards to the financially precarious, magnifying the country’s massive personal debt problem.

``Although we don’t have the detailed statistics to break things down specifically, it’s obvious that the significant part of consumers’ credit card loans is used by them to repay debt from other lenders,’’ said an official from the Strategy and Finance Ministry.

``For many people in difficult financial situations, card loans are their last resort before they take on the risky, high-interest loans from secondary banks and private money lenders. The bloating in credit card debt, therefore, is one of many indications that the debt problem for low-income families is aggravating quickly.’’

Credit card debt has been a problem here since the early 2000s, when policymakers relaxed regulations making it easier for people to get credit cards and bank loans in an attempt to boost consumer spending and provide a quick economic fix after the Asian financial crisis.

This had consumers embark on a credit-fuelled spending binge that eventually led to the near-collapse of LG Card, the then biggest credit card issuer in the country in 2002. The firm was saved at the last minute by a $ 4 billion bailout to cover its bad debts.

Observers are mixed on whether the country is condemned to suffer a repeat credit catastrophe, as the extensive borrowing continues to gather speed and threatens to leave millions of consumers unable to service their debts.

With the value of homes plummeting, banks tightening lending regulations, as well as energy and food bills on the rise, low-to-middle-class Koreans wrestles to bear the cost of living and repay their debts. Many of them turn to credit cards to make ends meet.

According to CREFIA, card firms last year approved nearly 24 trillion won in credit card loans, used mostly by low-income users in need of urgent cash. This is more than a 42 percent increase from the figures in 2009.

The companies, overzealous to expand market share, appear to be handing out cards without regard to the applicant’s financial health. According to industry figures, the number of cards issued to consumers with personal credit ratings between the scores of 7 to 10, which prevent them from borrowing from primary banks, reached 1.04 million at the end of last year, representing a staggering 62 percent year-on-year jump.

The siren for credit card debt grew louder in a heated debate between banking industry leaders in a recent meeting chaired by Financial Services Commission (FSC) Chairman Kim Seok-dong. During the meeting, Korea Development Bank (KDB) Chairman Kang Man-soo, the opinionated former finance minister and long-time aide of President Lee Myung-bak, lashed out at other top bankers for engaging in ``excessive’’ competition in credit cards.

``With credit card companies making huge profits in personal loans, savings banks were forced to turn to construction project loans, which led to the project financing mess we are encountering now. Credit cards have been the main culprits of the country’s ballooning household debt and the nation now seems to be on the brink of a second credit card crisis,’’ Kang said, calling out KB Financial Chairman Euh Yoon-dae and Shinhan Financial Chairman Han Dong-woo who were sitting close to him.

Shinhan has maintained its position as the country’s largest credit card issuer after it absorbed the troubled LG Card a few years ago. However, Shinhan is seeing increased competition from rivals KB, Woori and Hana Financial.

KB recently spun off its credit card unit as it looks to flex larger muscles in the market, while Hana is collaborating with leading mobile-phone carrier SK Telecom as it attempts to bring credit card services to chip-embedded mobile devices.