Korean card companies to raise bars for low-credit borrowers

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South Korean credit card companies are raising the lending thresholds for low- and middle-credit borrowers as the funding environment worsens due to rising interest rates.

According to the Credit Finance Association, eight mono-line credit card companies rejected card loan applications of borrowers with credit scores below 500 in September.

This is a change from previous months when KB Kookmin Card Co. offered card loans to borrowers with credit scores between 401 and 500 in July-August and Lotte Card Co. in June.

Card loan rates have also increased, with those of eight mono-line lenders averaging between 12.45 percent and 15.38 percent annually at the end of September, up from 12.02 percent to 14.42 percent a year ago.

The average rate for members with a score under 700 was between 15.56 percent and 18.57 percent, 3 percentage points higher than the overall average.

The total size of card loans has also declined. The card loan balance at the eight card companies was 35.6 trillion won ($2.70 million) in September, down 268.4 billion won from the previous month.

Card companies are tightening their lending as funding costs have grown due to higher bond rates at specialized credit finance firms.

The interest rate of a three-year AA- rated bond was 5.27 percent annually on October 31, up 0.3 percentage points from 4.97 percent at the end of the previous month.

As the rate is reflected in the interest rates of loan products such as credit card loans with a lag of two to three months, card loan rates are likely to rise further going forward.

The industry sees that low and middle-credit borrowers will find it harder to take out credit card loans as credit card companies struggling with increased bad debt costs may reduce their lending to vulnerable borrowers.

In fact, four out of the five credit card companies except for HanaCard Co. that announced third-quarter earnings saw their results dip from the same period last year. They are Samsung, Shinhan, Woori, and KB Kookmin Cards.

The decline in net income was driven by higher bad debt costs. The average delinquency rate on loans that are 30 days or more overdue at the five card firms increased to 1.34 percent in September this year from 0.81 percent a year ago.

Their bad debt expenses totaled 866 billion won in the third quarter, 85.2 percent higher than the same period last year.