Riding the Wave of Debt Investment and All-In Borrowing... Credit Card Companies Also Engage in 'Debt Business' (Comprehensive)

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

[Asia Economy Reporter Ki Ha-young] Amid the craze for debt-financed investment (Bitt-u) and all-in investment (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 suggesting 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) reached 3.9066 trillion KRW in August, 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 sharply, causing usage to surge 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, it turned to an upward trend from June. In June, card loan usage was 3.9415 trillion KRW, a 16.3% increase year-on-year. July also recorded 3.9891 trillion KRW, up 8.5% year-on-year, bringing card loan usage close to 4 trillion KRW.

The increase in card loan usage since June is analyzed to be partly influenced by a surge in credit loan demand for stock investment and real estate acquisition funds. 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 investment to use them. While it is presumed that some people facing financial hardship due to the prolonged COVID-19 pandemic used card loans despite high interest rates, there is also significant weight to the view that individuals riding the investment craze utilized them.

Card Loan and Cash Service Profitability at 167% in First Half of This Year... Criticism of "High-Interest Business"

As demand for such credit loans increased, credit card companies have also introduced "minus cards," similar to banks' overdraft accounts. The target customers are those 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 at 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 rates 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 that the increase in card loan usage represents profiteering through high-interest lending during the hardships caused by COVID-19. According to data on 'Card Company Funding Costs and Profitability' received by Park Kwang-on, a member of the National Assembly's Political Affairs Committee from the Democratic Party, 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 percentage point 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 through card loans and cash services.

Looking at quarterly figures, in the first quarter when COVID-19 occurred, they earned a 168.1% profit, spending 481.2 billion KRW on funding costs and earning 1.2901 trillion KRW. In the second quarter, they spent 476 billion KRW and earned 1.2661 trillion KRW, resulting in a profitability of 166.0%.

This increase in profitability has led to criticism that card companies, having borrowed money at low interest rates, maintained high interest rates for customers, thereby recording high profitability. It is pointed out that card companies are only benefiting from the Bank of Korea lowering the base interest rate to a historic low of 0.5% and the government's liquidity supply expansion to prevent economic recession caused by the spread of COVID-19.

Assemblyman Park stated, "Card companies are monopolizing the benefits of abundant liquidity and low interest rates by exploiting the COVID economic crisis," and urged, "Financial authorities should thoroughly investigate the cost structure of card companies and prepare related measures."

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