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. It 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 date, 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
Non-performing loans may be 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 period.
Example of Using the Net Charge-Off Rate
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 statistics identifying what debt is likely to 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.