A growing number of South Koreans are taking out new credit card loans to repay existing ones, as high interest rates and a slowing economy push rollover borrowing toward dangerous levels.
Outstanding card loans at nine credit card companies reached a record 43.25 trillion won ($30.3 billion) at the end of May, according to data released on the 12th by the Credit Finance Association. The balance fell for three straight months to 42.69 trillion won at the end of August, but borrowers shut out of bank lending by tighter rules continue to turn to card loans. Interest rates on new card loans average about 14%, rising to 17.20% on average for borrowers with low credit scores.
Borrowing to Repay Card Loans: Refinancing Jumps 23% This Year
The more serious problem is rollover borrowing. The balance of refinancing loans — new card loans taken from the same card company to repay an earlier one — stood at 1.70 trillion won at the end of August, up 22.7% so far this year. That is 2.9% higher than at the end of last year, when consumer sentiment had weakened amid the economic downturn, at 1.65 trillion won.
The balance of revolving credit, under which cardholders repay only part of their monthly bill and carry over the rest, approached 7 trillion won and has risen for five consecutive months. That means the number of borrowers unable to service their debt is increasing even as total card loan balances decline.
Behind the trend is a narrowing of access to bank credit. Those with unstable jobs or no income who fail bank screening find their options narrowed to card loans, which can be drawn immediately up to a set limit without collateral or proof of income.
Financial regulators have reviewed compliance with household lending caps and risk management practices at some card companies where loan balances grew rapidly.
The strain is also visible in personal accounts. Noh Ji-sun, a former member of the girl group Fromis_9, recently disclosed on YouTube that she turned to card loans after the group wrapped up its activities and she could no longer obtain bank loans, leaving her with mounting debt.
"I didn't even think about checking the interest rate. They said they would give me 3 million won right away, so I took it," she said. "After that, as my credit limit rose, I fell into a vicious cycle of taking out more loans to repay the old ones." Her case illustrates how even entertainers, once their income stops, can be shut out of bank lending and left dependent on high-interest card loans.