Consumers should be careful to avoid debt trap

Credit cards have become a major means of payment in the modern credit-based society, making it unnecessary for consumers to carry large amounts of cash. The government has also promoted the use of plastic as part of its efforts to prevent retailers from tax evasion. Salaried workers can claim income tax deductions for card payments.

Despite all the convenience and benefits, credit cards could put users in jeopardy if they overspend. Be careful not to fall into the trap of credit card debt. No one wants to see the specter of the 2002 credit card crisis haunt the nation again. During that time, 4 million card holders became defaulters.

Of course, the current situation is different from that 10 years earlier. Since then, many people have come to learn how to live within their means. But we can hardly rule out the possibility that a new card crisis might occur amid an economic slump.

Total payments by credit cards amounted to 558 trillion won ($485 billion) last year, up 7.8 percent from 2010. The figure has yet to reach a worrisome level, compared with 623 trillion won in 2002. The default rate is still stable at 1.8 percent.

But there are warning signs. Outstanding card loans totaled 28.2 trillion won in 2011. The sum appears negligible, considering the nation’s entire household debt of 900 trillion won. The problem is not the size. Most borrowers are those with lower credit ratings who may default if the economy worsens.

More serious is the fierce competition among plastic card firms to issue more cards to individuals, even to those with poor credit records. Leading card firms are subsidiaries of major local banking groups such as KB, Shinhan, Hana and Woori. They are desperate to increase their profit by charging far higher lending rates on credit card loans.

Card firms should give up the greedy practice of borrowing funds cheaply from their parent groups and imposing usurious lending rates on consumers. Otherwise, they cannot deflect criticism for making money at the cost of consumers.

Another negative factor is that credit card companies come under mounting pressure to impose lower commission on sellers. Many firms have already slashed their rates, inevitably causing a sizable fall in income. This could force card firms into a dog-eat-dog race to solicit more clients and increase their card use.

It is imperative to break the vicious cycle of card firms’ excessive competition of extending more usurious loans, luring more customers and creating more defaulters. Card holders are also required to refrain from reckless spending in order not to be mired in a debt trap.