After a Charging Spree, S. Koreans Face the Bill

There was the teenager who turned to prostitution to pay off her credit card bills. Then, the young couple, both college students, who had racked up $250,000 on their cards despite having virtually no income. And the man in his 40s who was carrying a cyanide pill when he came into the office.

As a debt counselor Seok Seung Oak’s job is part financial planner and part psychiatrist.

Seok spends his days listening glumly to all sorts of heart-wrenching stories from a tiny basement office cluttered with three telephones, two calculators and a giant bottle of antacid.

The latter is appropriate given the epic case of indigestion that South Korea is suffering after five years of binging on credit cards.

South Korea’s largest credit-card issuer, LG Card, was at the brink of collapse last month before its creditor banks agreed to a $1.7-billion bailout. The other big card issuers are believed to be not far behind.

Financial regulators here reported Tuesday that the industry had piled up losses of $3.45 billion through the first three quarters of this year.

An estimated 3.6 million South Koreans -- nearly one in six working people -- are delinquent in their credit-card payments.

The bust is forcing South Koreans to look back with a jaundiced eye on what in retrospect was a too-good-to-be-true recovery from a 1997 liquidity crisis.

In its aftermath, the government encouraged the use of credit cards to stimulate the economy.

The idea was that credit cards would boost consumer spending while preventing businesses from cheating on taxes with cash transactions.

“They were handing out these credit cards to students and the unemployed. Anybody could get a card, and most people had no idea how to use them,” Seok said.

Credits cards were peddled at subway stations and on university campuses -- often by attractive young women in miniskirts offering bonuses for new customers.

The government went so far as to offer tax rebates to anybody who had charges exceeding 10% of their income on credit cards.

Ordinary working Koreans were permitted to have up to 25 credit cards and could use them to withdraw tens of thousands of dollars in cash.

Even the homeless had credit cards, according to a March survey by government welfare officials inside shelters. They discovered that 27% had cards, many of them recently issued.

Until just a few years ago, South Koreans were relative innocents in the world of credit. They did most of their shopping with fat wads of cash and, like the Japanese, maintained high savings rates. But card usage increased nearly tenfold between 1998 and 2002.

Last year, South Koreans had charged $520 billion on their credit cards -- a staggering $11,000 for every man, woman and child, according to figures from the credit card association.

“It was like the college student who for the first time had the keys to daddy’s liquor cabinet,” said Brendon Carr, an American lawyer practicing in Seoul.

Song Soon Yong was fresh out of high school, living with her parents and working at her first job as a nursing assistant at a hospital.

One day, an ambulance driver at the hospital asked her to sign up for a credit card so that he could receive an $8 commission.

“You can always cut it up when it comes in the mail,” he told her.

That was exactly what Song intended to do. Instead, she went out and bought some clothes and makeup.

Then she took a cash advance to help out a girlfriend who was in default on her credit cards. But then she couldn’t pay the bill so she took out a cash advance to pay off the first credit card.

Before she knew it, Song had six cards and $21,000 in debts.

“I didn’t tell anybody. But one day a letter came in the mail saying that I was a credit delinquent. My parents almost killed me,” said Song, who is now 24 and going through credit counseling to try to pay back her debts.

Many other South Koreans got into trouble with credit cards not through impulse buying but by trying to start businesses. It had been relatively difficult to get a small business loan in South Korea so cash advances seemed an easy way to get off the ground.

One 33-year-old businesswoman, who was waiting at a credit counseling office with a baseball cap pulled low over her face, explained with some embarrassment that she had used cash advances to start a cosmetics store in Seoul.

For a while, business was good. Most of her customers were young women who made their purchases with credit cards.

But then it all came crashing down when the credit card companies, stung by rising delinquencies, abruptly lowered ceilings for cash advances and raised interest rates.

The credit card companies “kept increasing my credit limit,” said the businesswoman, who did not give her name. “Then they suddenly changed their policies.

“I didn’t have a chance.”

The reckoning came last year. A new regulation was enacted in July 2002 requiring parental consent before anyone under age 20 could get a credit card.

The credit card industry began running cautionary advertisements on television urging consumers to use their cards responsibly.

“I want to buy it, but do I really need it?” murmurs an actress in one LG Card advertisement, as she ogles a red leather pocketbook in a department store. A previous LG ad featured the same actress target shooting, while confidently declaring, “It’s the card that gives me force!”

But the new mood of moderation came too late for many. The South Korean press has been replete with stories of suicides, robberies and kidnappings committed by people desperate to pay off credit card debts.

In February, a 40-year-old man tried to defect to communist North Korea in order to escape his credit-card debts. The North Koreans refused to give him asylum and handed him back to South Korean authorities.

One distraught father killed himself out of despair that he could not help his 30-year-old unemployed daughter pay back more than $100,000 in credit card debt.

“I am indignant about credit card companies issuing credit cards to my daughter who had no ability to repay,” the father wrote in a suicide note addressed to South Korean President Roh Moo Hyun.

One reason for the despair is that there is no escape valve for those who get swamped in debt. People who file for personal bankruptcy here lose their right to have bank accounts, to hold professional licenses or to work as civil servants. Their family members can be held liable for paying back the credit card debts and risk losing the family home if they are unable to do so.

“The debt never disappears. You still have to pay it back, but you lose your ability to make money,” credit counselor Seok explained. “That’s how so many young lives get ruined.”

With so much of the South Korean population in arrears on their credit cards, it is increasingly becoming a political problem.

In October last year, a quasi-governmental credit counseling service opened in downtown Seoul, where it offers advice to about 600 people each day. The legislature is considering various bailout measures that would take the burden off ordinary debtors.

In the business community, there are widespread fears that the credit card bust has the potential to trigger a far larger crisis in the economy.

“Korean consumers will be afraid to spend money. Foreign investors will be afraid of the instability. I fear that psychologically this will have an impact and people will lose confidence in the economy,” said Lee Myong Shik, a business professor at Sangmyung University in Seoul.

Others see the credit card ordeal as a rite of passage that South Korea is going through as it becomes a more consumer-driven society.

Just as South Korean consumers were unprepared to use credit cards responsibly, the financial and legal systems were similarly ill-equipped for the rapid boom in credit cards, lawyer Carr said.

He believes that the banking system will develop better mechanisms to assess creditworthiness and to collect debts, while eventually a more humane approach to personal bankruptcy will be enacted.

“A few years ago, nobody in this country had any experience with getting or giving credit,” Carr said.

“This will be the experience that will prompt the reforms needed to make credit cards work.”