August Card Loan Usage Increases Double Digits... "Criticism of High-Interest Business"

7 Major Credit Card Companies
Card Loan Usage Approaches 4 Trillion Won in August
Criticism Over High Interest Rates Amid COVID-19 Economic Downturn

[Asia Economy Reporter Ki Ha-young] Amid the craze for debt-financed investing (Bitt-u) and all-in investing (Yeongkkeul), long-term loans from credit card companies, known as card loans, have increased by double digits. As bank and secondary financial institution credit loans surged, there is analysis that investors in stocks and real estate may have also turned to relatively high-interest card loans to secure investment funds.

According to the industry on the 5th, the card loan usage amount of seven major credit card companies (Shinhan, Samsung, KB Kookmin, Hyundai, Lotte, Woori, Hana) in August reached 3.9066 trillion KRW, an increase of 410.1 billion KRW (11.7%) compared to the same period last year.

This year, card loan usage peaked in March, then briefly declined before rising again from June. In March, due to the impact of the novel coronavirus disease (COVID-19), the number of people needing urgent funds for living expenses increased, causing a sharp rise to 4.3242 trillion KRW. Subsequently, with the government’s emergency disaster relief funds and low-interest policy funds being injected into the market, usage decreased to around 3.5 trillion KRW in April and May. However, from June, the trend reversed to an increase. In June, card loan usage was 3.9415 trillion KRW, up 16.3% year-on-year. July also recorded 3.9891 trillion KRW, an 8.5% increase year-on-year, bringing card loan usage close to 4 trillion KRW.

The increase in card loan usage since June is partly attributed to a surge in demand for credit loans to secure funds for stock investments and real estate acquisitions. The average interest rate on card loans is 13-14% per annum, with many cases exceeding 20% depending on creditworthiness. However, since loans can be approved within a day without separate screening, it is easy for self-employed individuals needing urgent funds or individuals seeking to secure liquidity through investments to use them. While it is presumed that some people facing financial hardship due to the prolonged COVID-19 pandemic used card loans despite the high interest rates, there is also strong speculation that individuals riding the investment boom utilized them.

As demand for such credit loans increased, credit card companies have also introduced "minus cards," similar to banks’ overdraft accounts. These are targeted at customers with excellent credit ratings. In August, Woori Card launched the "Woori Card Minus Loan," offering interest rates from 4.0% to 10.0% per annum with a maximum limit of 100 million KRW. Lotte Card also released a "Minus Card" last month. Interest rates start from a minimum of 4.95% per annum and are determined based on the customer's credit rating, with a maximum limit of 50 million KRW. Compared to the average interest rate of existing card loans, these are relatively low, and the advantage is that customers can freely use the funds within the loan limit at a fixed interest rate.

However, criticism has arisen regarding the increase in card loan usage, accusing credit card companies of profiting from high-interest lending during the difficult times caused by COVID-19. According to data on "Credit Card Companies’ Funding Costs and Profitability" received by Democratic Party lawmaker Park Kwang-on, a member of the National Assembly’s Political Affairs Committee, from the Financial Supervisory Service, the profitability of card loans and cash services of the seven major credit card companies reached 167% in the first half of this year. This is a 10% increase compared to the previous year. The seven major credit card companies spent 957.2 billion KRW on borrowing costs (interest on borrowings + bond interest) in the first half of this year and earned 2.5562 trillion KRW in revenue from card loans and cash services. Lawmaker Park stated, "In a situation where the Bank of Korea lowered the base interest rate to a historic low of 0.5% and the government expanded liquidity supply to prevent an economic downturn caused by the spread of COVID-19, credit card companies borrowed money at low interest rates but maintained high interest rates for customers, resulting in high profitability." He pointed out, "There is a phenomenon where credit card companies monopolize the benefits of abundant liquidity and low interest rates by exploiting the COVID-19 economic crisis."

This content was produced with the assistance of AI translation services.