The government is encouraging the expansion of mid-interest loans for borrowers with lower credit scores, leading to a phenomenon in the credit card market where interest rates for low-credit borrowers are lower than those for high-credit borrowers. This trend raises concerns about the financial stability of credit card companies as they increase mid-interest loan offerings.
According to the financial sector on August 30, Samsung Card reported that the average interest rate for credit card loans issued to borrowers with credit scores above 900 was 15.70% in July. This rate was 2.46 percentage points higher than the average rate of 13.24% for borrowers in the 800s and 1.41 percentage points higher than the 14.29% average for those in the 700s.
Overall, the interest rate gap based on credit scores is narrowing across the credit card industry. The average interest rate for credit card loans issued by eight major credit card companies to borrowers with scores above 900 increased from 11.06% in July of last year to 12.29% in July of this year, a rise of 1.23 percentage points. In contrast, the average rate for borrowers with scores below 700 decreased from 17.74% to 17.45% during the same period, a drop of 0.29 percentage points.
Typically, borrowers with higher credit scores are considered lower risk and receive lower interest rates. However, as credit card companies expand mid-interest loans within a limited total household loan quota, they have reduced lending to higher-quality borrowers, resulting in a narrowing of the interest rate gap between high and low credit score borrowers. In fact, Samsung Card issued mid-interest loans totaling 1.4389 trillion won in the first half of this year, a 58% increase compared to the same period last year.
The challenge is that as the volume of loans to mid- and low-credit borrowers increases, the financial health of credit card companies may deteriorate. As of the end of the first half of this year, the total delinquency rate for eight major credit card companies was 1.54%, up from 1.52% at the end of last year, indicating a downward trend in financial stability. Notably, the delinquency rate for credit card loans rose from 3.24% to 3.35%, an increase of 0.11 percentage points.
In this context, the government recently convened major credit card companies to further encourage the supply of mid-interest loans. While the increase in mid-interest loans is recognized as an exception in total household loan management, easing some regulatory burdens, concerns remain that rising funding costs and increasing delinquency rates continue to pose challenges to profitability and financial stability associated with expanding mid-interest loans.
A credit card industry official stated, "While the increase in mid-interest loans may reduce some burdens in terms of total volume, there are limits to expanding these loans given the rising funding costs and increasing delinquency rates, leading to significant concerns."
* This article has been translated by AI.
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