Net Charge-Off Rate

AAA

DEFINITION of 'Net Charge-Off Rate'

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.

INVESTOPEDIA EXPLAINS '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. Return On Total Assets - ROTA

    A ratio that measures a company's earnings before interest and ...
  2. Bad Debt

    A debt that is not collectible and therefore worthless to the ...
  3. Accounting

    The systematic and comprehensive recording of financial transactions ...
  4. Allowance For Doubtful Accounts

    A contra-asset account that records the portion of a company's ...
  5. Bad Debt Expense

    An entry found on a business's income statement that represents ...
  6. Charge-Off

    A term describing an expense on a company's income statement. ...
RELATED FAQS
  1. How is minimum transfer price calculated?

    A company that transfers goods between multiple divisions needs to establish a transfer price so that each division can track ... Read Full Answer >>
  2. What is the effective interest method of amortization?

    The effective interest method is an accounting practice used for discounting a bond. This method is used for bonds sold at ... Read Full Answer >>
  3. What does an unfavorable variance indicate to management?

    In managerial accounting, an unfavorable variance is discovered when a company's management performs a comparison between ... Read Full Answer >>
  4. Is there a way to include intangible assets in book-to-market ratio calculations?

    The book-to-market ratio is used in fundamental analysis to identify whether a company's securities are overvalued or undervalued. ... Read Full Answer >>
  5. What are some of the limitations and drawbacks of using a payback period for analysis?

    Limitations, or disadvantages, of using the payback period method in capital budgeting include the fact that it fails to ... Read Full Answer >>
  6. What is the difference between "closed end credit" and a "line of credit?"

    Depending on the need, an individual or business may take out a form of credit that is either open- or closed-ended. While ... Read Full Answer >>
Related Articles
  1. Personal Finance

    How The U.S. Government Formulates Monetary Policy

    Learn about the tools the Fed uses to influence interest rates and general economic conditions.
  2. Options & Futures

    Find Investment Quality In The Income Statement

    Use these key attributes to uncover top-level investments.
  3. Entrepreneurship

    Calculating (Small) Company Credit Risk

    Determining creditworthiness of smaller and medium-sized corporations isn't as easy as for larger companies, but these tips can help.
  4. Personal Finance

    What Are Central Banks?

    They print money, they control inflation, and much, much more. All you need to know about central banks is here.
  5. Fundamental Analysis

    An Introduction To The International Monetary Fund (IMF)

    Chances are you've heard of the IMF. But what does it do, and why is it so controversial?
  6. Investing

    The Ins and Outs Of In-Process R&D Expenses

    Are these charge-offs fair accounting or earnings manipulation? Learn more here.
  7. Options & Futures

    Who Backs Up The FDIC?

    The FDIC insures depositors against loss, but what happens if it runs out of money?
  8. Personal Finance

    How Basel 1 Affected Banks

    This 1988 agreement sought to decrease the potential for bankruptcy among major international banks.
  9. Economics

    Calculating Net Realizable Value

    An asset’s net realizable value is the amount a company should expect to receive once it sells or disposes of that asset, minus costs from its disposal.
  10. Investing Basics

    Calculating Unlevered Free Cash Flow

    Unlevered free cash flow (UFCF) is the free cash flow of a business before interest payments.

You May Also Like

Hot Definitions
  1. American Dream

    The belief that anyone, regardless of where they were born or what class they were born into, can attain their own version ...
  2. Multicurrency Note Facility

    A credit facility that finances short- to medium-term Euro notes. Multicurrency note facilities are denominated in many currencies. ...
  3. National Currency

    The currency or legal tender issued by a nation's central bank or monetary authority. The national currency of a nation is ...
  4. Treasury Yield

    The return on investment, expressed as a percentage, on the debt obligations of the U.S. government. Treasuries are considered ...
  5. Bund

    A bond issued by Germany's federal government, or the German word for "bond." Bunds are the German equivalent of U.S. Treasury ...
  6. European Central Bank - ECB

    The central bank responsible for the monetary system of the European Union (EU) and the euro currency. The bank was formed ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!