Notes From Another Credit Card Crisis

As President Obama stages a populist campaign against credit card companies’ predatory practices, the United States Senate is working on new regulations to protect card holders. Meanwhile, Americans’ credit card debt has risen to the point where it now tops $960 billion. And with the economy in a downswing, it’s hard to see how the debt can ever be paid back.

If it’s any consolation, South Koreans have been there, done that and come out alive — if just barely.

In 1999, after the Asian financial crisis, the South Korean government encouraged banks to issue credit cards to as many people as possible as a way to increase consumer spending (as well as to make it easier to collect taxes, which had been harder to monitor in a predominantly cash economy).

Hong Kwon-heui, a columnist for Dong-A Ilbo, a South Korean newspaper, recalled how, in the early 2000s, the streets of Seoul were littered with credit card vendors. Sitting in a Starbucks facing Sejong Avenue, he told me, “They were literally handing them out to college students, to the unemployed, to anyone who had time to fill out an application.” He said, “The country was force-feeding its people debts.”

South Koreans became hooked on plastic so dizzyingly fast that by 2003 they owned on average four credit cards each and their collective debts amounted to about $100 billion.

The cards had an additional allure as a status symbol, because previously in South Korea only the elite had them. “When I used credit cards, I somehow felt that others regarded me highly and that gave me confidence — and I forgot that I needed to pay it all back later,” said Kang Hee-yun, an office worker in her mid-40s, who eventually had to resort to “card kiting,” the trick of using one card to repay the debt on another.

The bill soon came due for many South Koreans. In 2003, a 34-year-old housewife harassed by creditors leapt to her death from her high-rise apartment after pushing out her three children. Families unraveled as their breadwinners lost their savings. A sudden surge in crime and prostitution led South Koreans to bemoan their “bankrupted society.” Finally, after millions had defaulted on payments, the government stepped in to help bail out LG Card, then the country’s largest issuer.

“The excess was similar to what’s happening with the American housing market today,” recalled Song Ji-hoon, a Rolex-wearing lawyer in his mid-30s who worked on behalf of one of the credit card companies. “Koreans wanted fancy cars, bigger TVs — although there was no real money to buy them — much the way those Americans thought that they could own houses with nothing but loans. Of course, in both instances, banks got greedy extending credits and mortgages to people who couldn’t pay back.”

It’s true that South Korea’s economic path bears little resemblance to America’s. In the 1960s, the South Korean government had nationalized the banks and divided the country’s resources among a handful of companies, including Samsung, Hyundai and LG. These family-owned conglomerates, known as the chaebol, dominated the economy.

In the early 2000s, the credit card divisions of Samsung and LG, trailed by Hyundai, competed fiercely in the new market.

Even today, despite the efforts of previous presidential administrations to decrease the power of the chaebol, it is still not unusual for a South Korean to wake up in a Samsung-made bed in a Samsung-built apartment, eat Samsung-manufactured food and drive a Samsung car to the office of a Samsung-affiliated company. Back in the early 2000s, a Samsung credit card, or one issued by Hyundai or LG, would have been another such extension. The chaebol had become the face of Korea, both domestically and abroad, and when their credit card divisions faltered in 2003, the South Korean government had little choice but to step in and ease social unrest by forgiving individual debts. The move was criticized by some as a return to the old ways of keeping the chaebol afloat.

Still, the government’s bailout worked. Although unemployment and personal bankruptcy rates remained high for a while, the worst was soon over. The credit card companies instituted stricter rules for issuing cards, and consumer spending plummeted briefly.

The real hangover can be seen in a shift in buying habits. Before the mass use of credit cards, Koreans had been big savers. In a culture where family members are expected to help one another financially, they put money away for everything. They also joined private money-pooling groups called “gye,” which allocate money for everything from children’s school and weddings to the celebration of a parent’s 60th birthday. In 1998, the household savings rate was 25 percent. By 2007, it had fallen to 2.5 percent.

South Korea managed to weather the storm, albeit with no shortage of heartbreak. Today Seoul’s neon-lighted streets burst with credit-card friendly shops — but high household debt has depressed spending. Some habits are hard to break.

Finishing his cappuccino, Mr. Hong, the newspaper columnist, opened his wallet to show me his cards. Not as many as he once had. One came with free passes to cultural events, another offered discounted loans. The third, well he couldn’t recall which perks it offered — save for comfort.

Suki Kim, the author of The Interpreter, a novel.