The Erosion of Short-Term Loan Funding for Low-Credit Borrowers: Lending Thresholds Rise

According to a recent report by Hankyoreh, the use of credit cards as ‘short-term funding’ for low-credit borrowers is becoming increasingly prevalent, leading to stricter lending assessments. While previously, individuals with low credit scores utilized credit card loans to fund short-term investments, regulatory tightening is limiting this practice, ultimately reducing access to credit for these borrowers. FireMarkets’ data analysis reveals a trend of increasing credit card loan sizes alongside rising short-term investment demand.

The Evolution of Credit Cards: Shift to Short-Term Funding and Regulatory Tightening

With increased volatility in the financial market, low-credit borrowers have increasingly sought credit card loans to fund investment returns. Historically, these funds were primarily deployed in stock or cryptocurrency markets, but recently, a rise in short-term ‘swing trading’ investors has led to a surge in credit card loan demand. However, financial authorities are concerned about this trend and are strengthening credit card lending assessment criteria, particularly for loans potentially used for short-term investments, applying stricter regulations.

Background of Regulatory Strengthening

Financial authorities assessed that excessive use of credit card loans for short-term investments could harm individuals’ financial health and destabilize the financial market. Particularly for low-credit borrowers, the risk of default is higher in case of investment failure, necessitating a more cautious approach. Therefore, financial authorities are comprehensively considering credit scores, income levels, and investment experience during credit card lending assessments and limiting loan amounts or strengthening collateral requirements for short-term investment loans.

The Rising Barrier to Borrowing

Due to the tightening of regulations, the conditions for obtaining a credit card loan have become more stringent, making it more difficult for low-credit borrowers to access credit. While it was relatively easy to obtain a credit card loan in the past, currently, approval for a loan requires a high credit score or stable income. This change is hindering the use of financial services by low-credit borrowers and could ultimately exacerbate financial exclusion.

Future Outlook and Considerations

As financial market volatility is expected to continue, credit card loan demand is likely to remain stable. However, regulatory tightening is expected to persist, and low-credit borrowers will need to strive to meet the conditions for obtaining loans. Furthermore, financial institutions need to develop customized financial products for low-credit borrowers and provide financial education programs to enhance their financial capabilities.