A salaried worker in their 40s with a credit score in the 900s, identified only as A, was taken aback after applying to extend a negative-balance credit line account. The rate on the 50 million won credit line opened at K bank had jumped 3.6 percentage points, to 8.8% from 5.2%. A said the increase was startling given that it was the first extension. The higher rate takes effect on the 7th of next month.
A is not alone in feeling the squeeze. One borrower with a perfect credit score of 1,000 wrote on an online forum that the rate on a 100 million won credit line rose to 5.89% from 4.35% upon extension. Another borrower with a score in the high 900s said the rate climbed about 2.5 percentage points, to 6.6%, during the extension process, adding, "I may have to pay off the credit line first."
As market rates climb sharply, rates on negative-balance credit line accounts at South Korea's internet-only banks are approaching 9%. With borrowers of near-perfect credit standing no more immune than those with lower scores, interest burdens are mounting for people who rely on such accounts for emergency cash or living expenses.
Rates on these accounts are rising fastest at internet-only banks, according to financial industry sources on the 18th. Data disclosed by the Korea Federation of Banks showed the average rate on newly extended credit lines at the three internet banks — KakaoBank, K bank and Toss Bank — was 7.30% in August, up 1.48 percentage points from 5.82% a year earlier. That is also 1.26 percentage points higher than the 6.04% recorded in January and the highest level in two years and three months, since May 2024, when the rate stood at 7.24%. By bank, KakaoBank was highest at 7.94%, followed by Toss Bank at 7.21% and K bank at 6.74%.
Over the same period, the average rate at the five major banks — KB Kookmin, Shinhan, Hana, Woori and NH Nonghyup — rose 0.64 percentage point to 5.17% from 4.53%. The increase at internet banks was about 2.3 times as large. The gap between the two groups widened to 2.13 percentage points from 1.29 percentage points.
Borrowers with top credit scores were not spared. The average rate the three internet banks applied to borrowers scoring 951 to 1,000 rose 0.64 percentage point to 6.17% in August from 5.53% in January. At the five major banks, the rate climbed to 5.11% from 4.68% over the same period. The burden is heavier for borrowers with lower scores. At KakaoBank, the rate for the 701-750 score bracket jumped 1.86 percentage points to 8.83% in August from 6.97% a year earlier. Assuming a borrower draws the full 30 million won on a credit line for a year, that adds roughly 560,000 won in annual interest.
Rates on these accounts have risen because they are more sensitive to increases in market rates. The rate is typically set by adding a spread to a benchmark rate that reflects market rates, then subtracting any preferential discounts. Because the rates are higher than those on ordinary unsecured loans, borrowers can feel a sharper increase in interest costs when rates rise. Data from the Korea Financial Investment Association's bond information system showed the yield on six-month bank bonds rose 0.951 percentage point to 3.748% on the 16th of this month from 2.797% on Jan. 2. The yield stood at 3.008% at the end of May and 3.471% at the end of August, remaining above levels seen early in the year.
Internet banks also widened their spreads. The average spread at the three internet banks rose 0.76 percentage point to 4.06% in August from 3.29% a year earlier. By contrast, the five major banks lowered theirs by 0.23 percentage point to 3.29% from 3.52% over the same period. The combination of higher market rates and wider spreads at internet banks is seen as having widened the lending-rate gap with the commercial banks.
Lending rates may keep rising for some time. The Bank of Korea raised its policy rate in July and again in August, and the U.S. Federal Reserve lifted rates last month, leaving room for market rates to climb further. Higher market rates raise banks' funding costs, which in turn pushes lending rates up. Most forecasts call for the BOK to hold its policy rate this month, though another increase before year-end cannot be ruled out.
"Higher market rates can feed through quickly to unsecured loan rates, including credit lines, where floating rates account for a large share," an official in the financial industry said. "Even borrowers with strong credit will find it hard to avoid a bigger interest burden."