Koreans Fall Madly in Love with Plastic

Is the country's credit-card binge a disaster waiting to happen?

In late March, police arrested four South Korean college students, charging them with an attempted bank robbery in Seoul using automatic rifles stolen from an army base. The students needed the money to pay off $11,300 in debts they had run up buying a car, brand-name clothes, and luxury goods for their girlfriends, police say. The incident has sparked hot debate--but not about whether Korean youth is going bad. Instead, Koreans are questioning their country's sudden love affair with credit cards. The robbery suspects are among the most notorious of a horde of new cardholders.

Credit-card use in South Korea is exploding. The value of credit-card transactions last year was $333 billion, almost seven times the 1998 level of $48 billion. In a country of 48 million people, the number of cards has soared from 42 million three years ago to 89.3 million today. That means each South Korean 20 or older has an average of four cards. "By all indications, the card market is expected to grow by at least 25% annually over the next several years," says Lee Ho Ki, manager at the Korea Non-bank Financing Assn., a trade group for the card industry.

South Korea regularly goes on binges, and this one may be helping the economy. Analysts say South Korea is forging a more balanced, consumer-oriented economy that's less reliant on industrial exports. Domestic spending helped South Korea defy a double-digit fall in exports last year and post a 3% growth rate. But there are concerns over consumers getting in over their heads; household debt jumped 28% last year. "We are not worried about the size of the credit-card business, but the speed of growth certainly calls for caution," says Kim Byung Tae, a consumer credit watchdog for the Financial Supervisory Service.

Oddly enough, the government itself bears much responsibility for Korea's credit frenzy. Two years ago it granted tax credits to both consumers and merchants who used or accepted credit cards. Its goal: to discourage tax cheating by small businesses that accepted only cash. The government even started a lottery in which $1.2 million was awarded every month to winners drawn from credit-card receipts. At the same time, the government is taking measures to prevent card abuse by proposing to cut back on cash advances to cardholders and banning companies from hawking cards on the street.

Meanwhile, credit-card companies and banks are enjoying the boom. From 1998 through 2000, profits of South Korea's seven credit-card companies leaped from $27 million to $2 billion. Citibank, the only foreign bank in the business, started issuing cards in South Korea in 1998 and now has nearly 1 million in use. LG Card Co.--the country's largest credit-card company, with 22.4% of the market last year--has succeeded by targeting different categories of customers. Holders of the LG Lady Card, for example, enjoy interest-free, three-month deferred payments at some department stores. Some 5 million women have signed up since 1999.

But is all this a bubble ready to burst? Interest rates are now at very low levels, and a quick rise might make the debt difficult to manage. One big trouble spot: About 60% of credit-card volume in Korea is cash advances, compared with less than 20% in the U.S. This suggests that many cardholders are paying off one card by getting cash from another. Delinquency rates are still low, but that's because some companies are aggressively writing off delinquent accounts. In addition, "low delinquency rates are shielded by the explosive growth of the volume," says Seoul-based Morgan Stanley Dean Witter & Co. analyst Michael Chung. "That will change once interest rates start rising."

Moreover, the screening of new customers appears to be lax. Take those students. They may not all be robbing banks, but a large number of them aren't paying their bills either. A recent survey showed that more than 60% of all university students carry credit cards, but only about half always pay their bills on time. Koreans are learning a hard lesson: The thrill of using plastic fades when it's time to write the check.

By Moon Ihlwan in Seoul

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