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June 02, 2011

  • News:  Korean Card Market Shaky 

    Korea is seeing early signs of credit card problems that could degenerate into a crisis unless regulators tighten the clamps. Every month the number of accounts has increased by one million and most adults have, on average, five credit cards. Korean card issuers are accepting customers without considering their credit worthiness. More than 50,000 issuers are offering perks to new customers, one being a credit cardholder in Korea can withdraw $5,000 from an ATM in one day! 10 years ago similar things were happening until the credit card bubble burst and shook the economy to its core resulting in many delinquencies and triggering the bankruptcy of the nation's largest LG card.

    The recent incentives are being used to lure credit-poor individuals who are generally not able to get bank loans. These customers then use multiple cards, rotating between them. Using one card to run up a balance and another to repay the debts - it's a vicious cycle. Households in the bottom 20 percent income bracket had an average of more than 17 million won in credit card debt. Outstanding credit card debt topped 23.9 trillion won last year, up 42 percent from 2009! If these risky credit customers start to default the number of delinquencies will jump suddenly.

    Issuers offer zero percent introductory interest rates to cardholders, allowing the consumer to pay back a major purchase in installments. Purchases on such cards will likely exceed 80 trillion won this year, higher than the amount in 2002 when the first card crisis erupted. Experts say issuers should put a ceiling on how much a multiple-card holder can withdraw and regulate vendors to prevent misleading and unnecessary card issuance. CEOs are warned that disciplinary action is coming for dishonest marketing strategies. And they go on to encourage credit card companies to adopt a self-regulating "gentlemen's agreement" to not issue cards to unqualified applicants.

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