Credit cards are the major borrowing tool behind the rapid rise in consumer debt in South Korea, the National Information and Credit Evaluation credit-scoring agency reported last week in a research note.

Approximately 66% of “excessive borrowers” in South Korea are using credit cards, according to the report.

The Seoul-based agency defines “excessive borrowers” as those with more than two outstanding loans. The amount borrowed is not a factor.

In comparison, only 11% of excessive borrowers were borrowing from insurance companies, and 16% were borrowing from savings banks.

In Korea, consumers with low credit scores use credit cards to get loans because they are easy to get, and the interest rates are relatively low compared with other loans, the agency notes.

Korean issuers charge about 20% annual interest, while savings banks usually charge more than 30%, an official at the Credit Finance Association of Korea, an industry organization representing card firms, tells PaymentsSource.

The portion of excessive borrowers among borrowers overall in Korea rose to 28% in December from 27% in December 2008, the report adds.

The structure of these risky loans is alarming for the economy, as most of the excessive borrowers are from the salaried middle class, according to the report.

“Excessive borrowers are often not the ones with the worst credit scores,” the report states. “More than 70% of them are rated higher than level six on a scale of 10," which is considered good.

Lenders find it more difficult to cope with the unpaid loans held by consumers with fair credit scores than ones held by individuals with low scores because they generally cannot be reclaimed using the same measures used with low-score individuals, according to the report.

“The fact that those heavy borrowers belong to the middle class means the national economy could sustain heavy damage if these loans deteriorate,” the reported noted.

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