Card loan rates fall to 13% but high-rate borrowers near 20% surge

The average interest rate on card loans fell to the 13% range in three months, but this is an illusion caused by benefits concentrated on high-credit borrowers. In reality, the proportion of credit-vulnerable borrowers paying rates near the legal maximum of 20% per year is growing. Credit card companies are imposing high add-on rates on low-credit borrowers pushed into card loans by first-tier lenders' loan curbs, citing asset soundness management.

According to the Credit Finance Association of Korea on Nov. 9, the average share of members in the 18–20% annual interest rate bracket at seven card-only issuers—Samsung, Shinhan, Hyundai, KB Kookmin, Lotte, Hana and Woori Card—stood at 25.9% as of end-September. That is up 2.9 percentage points from 23% a year earlier. More than one in four card loan users is paying interest just below the legal maximum.

In contrast, the average card loan rate at eight card-only issuers including BC Card was 13.55% as of end-September, down 0.55 percentage point from 14.10% the previous month and entering the 13% range. The average rate for prime borrowers with credit scores above 900 fell to around 10.9% per year, but the rate for low-credit borrowers with scores of 700 or below remained in the 17% range, unchanged from a year earlier. The decline in the average rate is merely a statistical result of increased mid-rate lending centered on prime borrowers, far from reducing the actual interest burden on vulnerable borrowers.

Looking at individual card companies, the concentration of high rates is even more pronounced. Hana Card's share of members in the 18–20% bracket surged 14.1 percentage points from 4.4% at end-September last year to 18.5% at end-September this year. Samsung Card and Hyundai Card also saw their high-rate borrower shares rise 8.6 percentage points from 29.1% to 37.7% and 8.4 percentage points from 23.6% to 32%, respectively, far exceeding 30%. The companies explained that they adjusted base rates to reflect changes in funding costs, but they cannot easily avoid criticism that they rapidly pushed vulnerable borrowers into high-rate brackets in a short period.

Some card companies such as Lotte Card and Woori Card saw slight declines in the share of maximum-rate borrowers, but it is hard to interpret this as a sign of improved asset soundness. Lotte Card's share of members in the 18–20% bracket fell 3.9 percentage points from 36.9% to 33%, but remained in the 30% range, while the share of low-rate members below 10% per year surged from 8.23% to 23.2%. This is closer to the result of adjusting the denominator and numerator by applying cut-off filtering that reduces credit limits or stops lending altogether to marginal borrowers with high delinquency risk. In effect, the company focused on weeding out risky borrowers rather than actually lowering rates.

This distorted rate structure is deepening polarization in tandem with banks' tightening of household loans. As lending thresholds such as the stressed debt service ratio (DSR) have risen, multiple-debt borrowers facing funding shortages have been pushed into non-bank lenders. As even savings banks and lenders have tightened new lending due to deteriorating asset soundness, demand has concentrated on card loans, the last resort for emergency cash. But card companies, citing the need to prevent asset deterioration, are imposing exorbitant add-on rates on borrowers with weak repayment capacity, accelerating credit risk.

The apparent decline in the average card loan rate masks the fundamental crisis that low-credit multiple-debt borrowers' repayment capacity has reached its limit. The business practice of charging high rates to vulnerable borrowers to earn short-term interest margins could become a self-defeating move that increases the likelihood of cascading defaults and nonpayment in the medium to long term. As card companies' credit operations, which have passed on higher funding costs entirely to low-credit borrowers, could come back as large-scale nonperforming loans, how solidly each card company secures proactive loss-absorbing capacity including loan-loss provisions will be a key indicator for defending year-end asset soundness.

※ This article is an AI translation of the Korean original published by Korea Credit News; it was checked by automated quality guards and published by the English edition desk.