What is the 'Net Charge-Off Rate'

The net charge-off rate is the dollar amount representing the difference between gross charge-offs and any subsequent recoveries of delinquent debt. The net charge-off is often a percentage representing that amount of debt that a company believes it will never collect compared to average receivables. Debt that is unlikely to be recovered is often written off and classified as gross charge-offs. If, at a later debt, some money is recovered on the debt, the amount is subtracted from the gross charge-offs to compute the net charge-off value.

BREAKING DOWN 'Net Charge-Off Rate'

Bad debt or poor credit quality loans are regularly charged off as bad debt and purged from the books, often on a monthly or quarterly basis. If and when part of the debt is repaid, the net charge-off can be calculated by finding the difference the gross charge-offs and the repaid debt. A negative value for net charge-offs indicates that recoveries are greater than charge-offs during a particular.

For example, if a bank lends $1 million in one year but only expects to get back $900,000, then the gross charge-off is $100,000. If the bank recovered $25,000 from the year before, it is added to the gross charge-off to get a net charge off of $75,000. The net charge-off rate is based on statists identifying what debt is likely to become default. A credit card company, for example, may post a 10.31% net charge off rate, meaning that, for the specified period, the company expects that 10.31% of its debt will never be recovered.

RELATED TERMS
  1. Charge-Off

    A charge-off is a debt, for example on a credit card, that is ...
  2. Early Amortization

    A type of credit enhancement used in certain asset backed securities ...
  3. Net Income After Taxes - NIAT

    An accounting term, most often found in a company's annual report, ...
  4. Derogatory Information

    Information on a person's credit report that can be legally used ...
  5. Bad Debt Recovery

    A debt from a loan, credit line or accounts receivable that is ...
  6. Nonaccrual Experience Method - ...

    An accounting procedure allowed by the Internal Revenue Code ...
Related Articles
  1. Investing

    Accounting Rules Could Roil The Markets

    FAS 142 is an accounting rule that changes the way companies treat goodwill. Be aware of the impact it has on reported earnings to avoid making bad investment decisions.
  2. Personal Finance

    4 Key Takeaways From Wells Fargo's Earnings Report

    Wells Fargo is in a position of strength because of its low exposure to oil, smaller capital requirements, Fed actions and a robust domestic economy.
  3. Investing

    Will Corporate Debt Drag Your Stock Down?

    Borrowed funds can mean a leg up for companies or the boot for investors. Find out how to tell the difference.
  4. Personal Finance

    Why Debt Isn’t Always a Bad Thing

    When managed properly, debt can be used to achieve a higher overall rate of return.
  5. Financial Advisor

    The 4 Best Debt Reduction Services

    It can be tricky to find the best debt reduction services for your financial situation. These top 4 debt consolidation firms help make the process easier.
  6. Insights

    The National Debt Explained

    We know it's growing, but we don't know exactly how. An in-depth look why the U.S. Government's debt continues to balloon and what it all means for you.
  7. Personal Finance

    Sizing Up Debt

    Ever wonder if the different types of debt are good or bad? Read on and we'll tell you.
  8. Personal Finance

    Best 5 Money-Saving Tips to Get out of Debt

    Understand the different types of debt and the reasons why people get into debt. Learn about five tips to follow to get out of debt.
RELATED FAQS
  1. Why do banks write off bad debt?

    Learn more about the practice of banks writing off bad debts and removing them from their books, including a hypothetical ... Read Answer >>
  2. How will debt settlement affect my credit score?

    Learn how a debt settlement arrangement, though sometimes the best option to eliminate an outstanding debt, can negatively ... Read Answer >>
  3. What's the difference between debt consolidation and debt management or debt settlement?

    Learn about different ways of handling debt when you become overwhelmed, including debt consolidation, debt management and ... Read Answer >>
  4. What is the difference between the debt ratio of a company and the debt ratio of ...

    Discover the different financial evaluation measures that are most commonly applied to individuals and corporations, respectively. Read Answer >>
  5. What are the differences between gross profit and net income?

    Find out how companies determine gross profits and net income, and how these figures provide quick snapshots of their financial ... Read Answer >>
Hot Definitions
  1. Leveraged Buyout - LBO

    The acquisition of another company using a significant amount of borrowed money (bonds or loans) to meet the cost of acquisition. ...
  2. Current Assets

    A balance sheet account that represents the value of all assets that can reasonably expected to be converted into cash within ...
  3. Tax Liability

    The total amount of tax that an entity is legally obligated to pay to an authority as the result of the occurrence of a taxable ...
  4. Preferred Stock

    A class of ownership in a corporation that has a higher claim on its assets and earnings than common stock. Preferred shares ...
  5. Net Profit Margin

    Net Margin is the ratio of net profits to revenues for a company or business segment - typically expressed as a percentage ...
  6. Gross Margin

    A company's total sales revenue minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage. ...
Trading Center