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. 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. Personal Finance

    How Basel 1 Affected Banks

    This 1988 agreement sought to decrease the potential for bankruptcy among major international banks.
  8. Options & Futures

    Who Backs Up The FDIC?

    The FDIC insures depositors against loss, but what happens if it runs out of money?
  9. Fundamental Analysis

    What is the difference between operating income and net income?

    Understand the difference between operating income and net income, including the calculations and interpretations of each when reading a balance sheet.
  10. Fundamental Analysis

    What is the difference between operating income and EBITDA?

    Read about the major differences between earnings before interest, taxes, depreciation and amortization (EBITDA) and operating income in a company's financial health.

You May Also Like

Hot Definitions
  1. Christmas Tree

    An options trading strategy that is generally achieved by purchasing one call option and selling two other call options at ...
  2. Christmas Club

    A short-term savings account that usually pays out the full account balance to its account holders once each year, right ...
  3. Boston Snow Indicator

    A market theory that states that a white Christmas in Boston will result in rising stock prices for the following year. For ...
  4. Christmas Island Dollar

    The former currency of Christmas Island, an Australian island in the Indian Ocean that was discovered on December 25, 1643. ...
  5. Santa Claus Rally

    A surge in the price of stocks that often occurs in the week between Christmas and New Year's Day. There are numerous explanations ...
  6. Commodity

    1. A basic good used in commerce that is interchangeable with other commodities of the same type. Commodities are most often ...
Trading Center