[Korea] Credit Unraveled: The South Korean Credit Card Crisis and Its Enduring Impact (2002)

1. The South Korean Credit Card Crisis of the Early 21st Century

In 2002, nearly five years after South Korea had emerged from the 1997 foreign exchange crisis, the nation faced its first economic challenge of the 21st century, plunging millions into credit delinquency. The crisis, often referred to as the "2002 Card Crisis" or "LG Card Crisis" due to the collapse of then-market leader LG Card, wreaked havoc on Korea's economy and society through 2006.

2. Background to the Crisis

The administration under President Kim Dae-jung, which began in 1998, sought to rejuvenate the economy post the foreign exchange crisis and simultaneously clamp down on prevalent tax evasion. The government promoted credit card use to boost consumption and reduce tax evasion through cash transactions, significantly relaxing regulations around credit cards. 

From enabling higher cash withdrawals on credit cards to introducing income tax deductions and receipt lottery systems, credit card use was heavily encouraged. 

This resulted in a tenfold increase in credit card spending from 1998 to 2002, from 63.6 trillion to 622.9 trillion won.

3. Causes of the Crisis

The core issue arose from credit card companies issuing cards too liberally, even to those ill-suited for credit. This was exacerbated by intense competition among card issuers. 

Notably, LG Group focused aggressively on outperforming Samsung in the credit card market, neglecting prudent management. Marketing strategies, including high-profile advertisements and promotions, created a perception that life could be glamorous with credit cards, leading to imprudent usage among financially naive consumers.

4. Early Signs of Trouble

The government and credit card companies overlooked that the Korean economy had not fully stabilized post the 1997 crisis, leading to increased credit card use even among those with unstable or no incomes. 

This was a predictable outcome since credit cards essentially allow for current spending against future debt, without the immediate financial pain of payment.

5. The Fallout

By 2002, consumer bankruptcies began to rise sharply, and by 2003, the default rate on credit card payments had reached an alarming 14%. 

Many credit card companies faced insolvency or were absorbed by other firms. The government belatedly tightened regulations, and the rapid increase in credit card loans, which had attracted consumers with their ease of access despite high-interest rates, compounded the problem.

6. Long-term Impact

This crisis had profound socio-economic impacts, including a dip in national birth rates and a more cautious approach to credit card usage among the public. 

The crisis was a harsh lesson in financial literacy for the general public, leading to more conservative spending and better financial management practices moving forward.

End.

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