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. Accounting

    The systematic and comprehensive recording of financial transactions ...
  2. Bad Debt

    A debt that is not collectible and therefore worthless to the ...
  3. Allowance For Doubtful Accounts

    A contra-asset account that records the portion of a company's ...
  4. Charge-Off

    A term describing an expense on a company's income statement. ...
  5. Return On Total Assets - ROTA

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

    An entry found on a business's income statement that represents ...
Related Articles
  1. How The U.S. Government Formulates Monetary ...
    Personal Finance

    How The U.S. Government Formulates Monetary ...

  2. Find Investment Quality In The Income ...
    Options & Futures

    Find Investment Quality In The Income ...

  3. Calculating (Small) Company Credit Risk
    Entrepreneurship

    Calculating (Small) Company Credit Risk

  4. What Are Central Banks?
    Personal Finance

    What Are Central Banks?

comments powered by Disqus
Hot Definitions
  1. Last In, First Out - LIFO

    An asset-management and valuation method that assumes that assets produced or acquired last are the ones that are used, sold ...
  2. Ghosting

    An illegal practice whereby two or more market makers collectively attempt to influence and change the price of a stock. ...
  3. Elasticity

    A measure of a variable's sensitivity to a change in another variable. In economics, elasticity refers the degree to which ...
  4. Tangible Common Equity - TCE

    A measure of a company's capital, which is used to evaluate a financial institution's ability to deal with potential losses. ...
  5. Yield To Maturity (YTM)

    The rate of return anticipated on a bond if held until the maturity date. YTM is considered a long-term bond yield expressed ...
  6. Net Present Value Of Growth Opportunities - NPVGO

    A calculation of the net present value of all future cash flows involved with an additional acquisition, or potential acquisition. ...
Trading Center