More people seek revolving credit amid rising prices, higher interest rates

Commuters walk past ad for a debt-related law firm posted on a wall of a subway station in Seoul, Nov. 22. Yonhap

A record-number of credit card users have resorted to revolving credit, a major indicator of credit risk, cornered by a rise in both interest rates and the prices of goods and services, data showed Monday.

Revolving credit is an agreement whereby an account holder can borrow money repeatedly up to a set limit while repaying in installments. Credit card users borrow money at high interest rates of up to 20 percent after they fail to pay balances owed in time. The greater the amount and the period of borrowing, the higher the rates. Most of the credit is used by mid- and low-credit borrowers.

According to the Credit Finance Association, the balance of revolving credit settled by eight local credit card firms – KB Kookmin, Shinhan, Woori, Hana, Samsung, Hyundai, Lotte and BC – came to over 7.4 trillion ($5.6 billion) as of November, the second-highest figure nearing an all-time high of 7.5 trillion seen in September.

This month’s figure came despite a surge in revolving credit fees that averaged 16.65 percent in October, up over 50 basis points from June’s 16.03 percent.

More than a third, or 35.6 percent, of revolving credit users, the association data showed, paid an interest rate of between 18 and 20 percent in October.

The balance of cash advance on credit cards came to 6.5 trillion won in the same month, the highest figure this year.

The loan program is where the amount of money cardholders transfer or withdraw as a cash advance will appear on the credit card statement and interest will begin accruing right away. The service charges higher interest rates than regular card purchases and a separate fee.

Credit card loans, loans with longer maturity periods compared to cash advances and therefore considered stable, also exceeded 35.8 trillion won in October after a peak of 35.8 trillion won in August.

The concerning development is likely to continue, as anchored by sustained elevated prices of goods and services compounded further by high borrowing rates.

Market watchers say household purchasing power is limited, since the growth of workers’ income is falling far behind their consumption expenditure including the minimum cost of living.

“A rise in revolving credit could trigger a series of defaults by low-income delinquent borrowers, resulting in an unwanted social problem in a harsh economic climate,” former chair of the Korea Economic Association Lee In-ho said.

Three of the local card firms exceeded 2 percent in the delinquency rate in the third quarter of this year. This was the first time that the number surpassed three since March 2015.