4. Understanding credit and debt

Sources checked September 6, 2026. Unless stated otherwise, amounts, rates, and probabilities are illustrative assumptions. Institutional rules refer to Korea.

An offer to borrow KRW 50 million is different from a plan to repay it while living your life. A lender decides under its underwriting criteria. You must also consider living costs, uncertain income, and expenses still ahead.

A credit score does not replace a budget

A credit score estimates repayment behavior using credit information. The CFPB describes scores as model-based calculations that can differ between models.¹ This general concept does not make U.S. score ranges or factor weights applicable in Korea.

Even excellent credit leaves little repayment room if housing and caregiving consume most income. My proposed starting calculation is take-home pay minus essential expenses, existing debt payments, and planned expense reserves. Before allocating the remainder to new debt, repeat the calculation with lower income.

Split every payment into principal and interest

Principal is the unpaid debt. Interest is the charge for using it. In a fixed-payment amortizing loan, a declining balance means the interest share of each payment falls over time.²

Here is an invented KRW 12 million loan at a fixed annual rate of 6%, repaid over twelve months. Assume a monthly rate of 0.5%, month-end payments, and no fees or day-count differences. Real schedules may differ because of rounding and contract terms.

Equal-principal repayment reduces principal by KRW 1 million each month. Interest consequently falls from KRW 60,000 to KRW 55,000 and onward. The equal-payment formula is P × r ÷ (1 - (1+r)^(-n)), where P is original principal, r the monthly rate, and n the number of payments. Total interest above uses the unrounded payment amount.

The interest-only option makes ordinary months look easy, but leaves all principal due at maturity. Assuming a replacement loan will always be available is not a complete repayment plan.

Stress a changing rate

For an invented interest-only KRW 12 million balance, a rate increase from 4% to 7% raises monthly interest from KRW 40,000 to KRW 70,000. The rate rises three percentage points; the interest bill rises 75%. Always identify the denominator behind a percentage.

A comparison should also record rate reset dates, conditions for discounts, early repayment charges, guarantee fees, and the remaining balance at maturity. Compare refinancing costs with prospective interest savings over the same remaining period. These are questions to investigate in the contract, not claims that every product has identical terms.

Put the repayment plan on one page

List every balance, rate, payment date, minimum payment, and maturity. Test whether basic payments remain possible if income falls. When choosing extra repayments after meeting those obligations, compare rates and charges alongside the emergency cash you would retain. Using every available won to repay debt can create a need to borrow again for living expenses.

If the next payment is already short, put a discussion with the lender about repayment options ahead of additional investment plans. Today's task is to expose the amount and date of the shortage. The next chapter connects borrowing with housing and family decisions.

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Previous chapter: Savings, emergency funds, and room to choose · Series contents · Next chapter: Housing, family, and major expenses

Footnotes

1. Consumer Financial Protection Bureau, What is a credit score?. Score purpose and model differences; no Korean score formula is inferred. ↩

2. Consumer Financial Protection Bureau, How does paying down a mortgage work?. Principal, interest, and fixed-rate amortization. The three numerical schedules are the author's calculations. ↩