[Op-Ed] Revolving Credit and Bad Debt Among Those in Their 20s and 30s

Financial Firms Must Not Drive Users into Default Through Misguided Profit-Seeking

Revolving minimum payment ratio 5–10%, fees at 19.99%, just below the legal maximum interest rate

When people find it difficult to pay for expensive items in a lump sum, they usually use installment services. The concept of installment payments is familiar even to those not engaged in economic activity. That is because it is a relatively safe service used by the vast majority of people and one that does not greatly affect credit ratings. Recently, however, a service that quietly eats away at the souls of people in their 20s and 30s has been spreading. It is the so-called “revolving service.”

Revolving is one of the credit card services offered by card companies and is also called a “partial payment carryover agreement.” The difference between ordinary credit card payments and revolving is that ordinary card payments are settled in full on the agreed payment date, whereas with revolving, only a minimum amount is paid on that date and the remaining balance is rolled over as a loan.

Card companies and financial firms are aggressively marketing revolving services. The reason is clear: they want to earn more interest. The minimum payment ratio for revolving is 5–10%, and the fee reaches 19.99%, just below the legal maximum interest rate. From the card user’s perspective, however, revolving is tempting because it does not immediately lower one’s credit score and allows part of the payment due to be postponed without becoming delinquent.

The interest rate on revolving is set higher for those with lower credit scores. In some cases, it is even set higher than the late fees charged when a card payment is actually overdue. Young people in their 20s and 30s who lack a sound financial mindset may avoid the worst-case scenario of delinquency, but as the rolled-over amount and interest burden grow, card bills arise every month, creating a vicious cycle that eventually leads to a drop in credit scores.

The amount of overdue revolving balances and the delinquency rate are rising steeply and hitting record highs. Due to DSR (Debt Service Ratio) regulations, card companies have raised the threshold for cash advances and long-term card loans, driving first-time workers and multiple debtors toward revolving services, which require no separate screening.

Meanwhile, the Financial Supervisory Service is implementing a service improvement measure related to revolving called “strengthening the duty to explain to consumers.” This is because card companies have been pushing promotional sign-up calls that mention only the benefits of revolving, as well as promotions featuring phrases like “minimum payment” and cashback offers. However, because the Financial Supervisory Service is not imposing any specific disadvantages on financial institutions, the policy of merely “strengthening the duty to explain” has not been very effective in practice.

The most concerning issue at this point is that the increase in bad loans and delinquency rates caused by revolving could soon lead to worsening performance across the card industry. Will this lead to a card crisis like in the past? Fortunately, it is said that this is unlikely to develop into a major economic problem. Today, the public generally has a higher level of understanding of credit cards, so it is unlikely to result in major economic turmoil.

Card use, once encouraged in pursuit of a credit-based society, is now leading to irresponsible consumption behavior such as revolving, which in effect rolls over delinquency itself. Individuals should make it a habit to use debit cards instead of credit cards and set their agreed payment ratio as close to 100% as possible, thereby reducing accumulated payment balances and minimizing the harm caused by revolving.

Furthermore, financial firms must not drive users into default through misguided profit-seeking. Pushing promotions aimed at low-income people who lack the cash to pay immediately is an act that reveals financial firms as entities concerned only with profit. In particular, with regard to revolving, insufficient disclosure of information and indiscriminate enrollment unrelated to the individual’s intentions should be avoided. Instead, financial services should be developed for the groups seeking to spend money so that today’s difficulties can be overcome.

The Financial Supervisory Service has reportedly strengthened the comparative disclosure system for card loan and revolving interest rates and added a “card bond interest rate item” to the disclosure section. This is meant to inform consumers of any changes in the interest rates of products handled by card companies. Going forward, if the financial authorities are to strengthen consumers’ right to choose and encourage autonomous competition in interest rates, they must overhaul the overall financial system so that those in their 20s and 30s can better manage their credit.

If someone falls on a road full of potholes, it is not solely the walker’s fault. Still, compared with middle-aged people, those in their 20s and 30s may be less alert to overdue balances and debt because they have more open paths to employment and investment. But no one knows when the economy will improve or worsen. Nothing is better suited to building financial strength than saving and restrained consumption. “Spend less and save more” may be simple, but in the end it is the essence of sound consumption habits. At a time when revolving services are leading low-income earners and first-time workers in their 20s and 30s into default, one hopes that individuals, financial firms, and the Financial Supervisory Service will all share responsibility for paving a better path.

Suhyun Park, Intern Researcher, Center for Free Enterprise (CFE)

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Original title: [칼럼] 리볼빙이 쏘아올린 2030 신용불량

Author: Su-hyeon Park

Date: 2024-02-29

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=free_opinion&idx=26484