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. Net Charge Off - NCO

    The dollar amount representing the difference between gross charge-offs ...
  2. Charge-Off

    A term describing an expense on a company's income statement. ...
  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. Nonaccrual Experience Method - ...

    An accounting procedure allowed by the Internal Revenue Code ...
  6. Cost of Debt

    The effective rate that a company pays on its current debt. This ...
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

    Household Debt Surpasses $90,000

    Study finds that the average debt in U.S. households is over $90,000.
  3. 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.
  4. Taxes

    Understanding Bad Debt

    Bad debt is money a company or lender is owed, but is unable to collect.
  5. 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.
  6. Retirement

    Why Retirees Are Carrying More Debt Than Ever

    As people reach retirement they are carrying more debt than ever before. Why and what to watch for.
  7. Insights

    Americans' Total Net Wealth Rises to Record Level

    According to the first quarter 2016 figures put out by the Federal Reserve, the aggregate net worth of U.S. households and nonprofits rose to $88.1 trillion.
  8. Investing

    Does 2016 Spell the End of a Global Debt Cycle?

    Examine the growth of global debt from 2010 to 2015. Emerging market debt has grown significantly, while advanced economy debt has grown marginally.
  9. Personal Finance

    Digging Out Of Personal Debt

    Good intentions can put consumers in even more personal debt.
RELATED FAQS
  1. Why would you look at a company's net debt rather than its gross debt?

    Learn the difference between net debt and gross debt, how to calculate debt using a company's financial statements and why ... Read Answer >>
  2. 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 >>
  3. 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 >>
  4. Which developed country has the most debt?

    Discover the nations that have the largest net government debt, viewed in terms of absolute dollar amount or as a percentage ... Read Answer >>
  5. What is the difference between subordinated debt and senior debt?

    Understand the difference between subordinated debt and senior debt. Learn what a company is required to do in case of bankruptcy. Read Answer >>
  6. If a collection agency buys my debt from another agency, does the debt become 'new'?

    Find out what happens when your debt account is sold from one collection agency to another and the impact on your balance ... Read Answer >>
Hot Definitions
  1. Pro Forma

    A Latin term meaning "for the sake of form". In the investing world, it describes a method of calculating financial results ...
  2. Trumpcare

    The American Health Care Act, also known as Trumpcare and Ryancare, is the Republican proposal to replace Obamacare.
  3. Free Carrier - FCA

    A trade term requiring the seller to deliver goods to a named airport, terminal, or other place where the carrier operates. ...
  4. Portable Alpha

    A strategy in which portfolio managers separate alpha from beta by investing in securities that differ from the market index ...
  5. Run Rate

    1. How the financial performance of a company would look if you were to extrapolate current results out over a certain period ...
  6. Hard Fork

    A hard fork (or sometimes hardfork) is a radical change to the protocol that makes previously invalid blocks/transactions ...
Trading Center