What Is a Roll Rate?
In the credit card industry, the roll rate is the percentage of cardholders who become increasingly delinquent on their account balances due. The roll rate is essentially the percentage of card users who "roll" from the 60-days late category to the 90-days late category, or from the 90-days late to the 120-days late category, and so on.
- The roll rate is the percentage of credit card cardholders that roll from one category of delinquency to the next.
- For instance, you can measure the percentage of cardholders who roll from 60-days overdue to 90-days overdue.
- Roll rates are used to estimate financial losses due to future defaults.
Understanding Roll Rates
Roll rates are used by banks to help manage and predict credit losses based on delinquency. In the credit card industry, creditors report late payments in 30-day increments beginning with the 60-days late category and ranging through 90-days late, 120-days late, 150-days late and so on up to charge-off. Charge-offs are subject to private company discretion and state laws. For federal loans, a charge-off is required after 270 days according to federal regulation.
Calculating Roll Rates
Financial institutions have varying methodologies for calculating roll rates. They may calculate roll rates by the number of borrowers in delinquency or the amount of funds delinquent.
For example, if 20 out of 100 credit card users who were delinquent after 60 days are still delinquent after 90 days, the 60-to-90 days roll-rate is 100%. Furthermore, if only 10 out of 20 credit card issuers who were delinquent at 60 days are now delinquent at 90 days, the roll rate would be 50%.
When considering delinquency roll rates by balances, a bank will base their calculations on total delinquent balances. For instance, if the 60-day delinquent balance for a small bank's credit card portfolio in February is $100 million, and the 90-day delinquent balance for March is $40 million, the 60-to-90 day roll-rate in March is 40% (i.e., $40 million/$100 million). This implies that 40% of the $100 million receivables in the 60-day bucket in February have migrated to the 90-day bucket in March.
Credit card issuing banks estimate credit losses by segregating their overall credit card portfolio into delinquency "buckets," similar to the 60-day, 90-day categories mentioned earlier. A bank's management measures roll rates for the current month and current quarter, or an average of several months or quarters to smooth out fluctuations. Roll rates may also be further broken down by product category or borrower quality to gain a better understanding of delinquencies overall.
Credit Loss Provisions
Once roll rates are determined, they are applied to the outstanding receivables within each bucket, and the results are aggregated to estimate the required allowance level for credit losses. Financial institutions typically update credit loss provisions in their financial statements quarterly. Credit loss provisions are generally an expense or liability that a bank writes off. Banks have differing methodologies for determining credit loss provisions with typically only a portion of delinquent balances written off in early delinquencies. Banks closely monitor roll rates and credit loss provisions to gauge the risks of borrowers. Roll rates can also help credit issuers to set underwriting standards based on repayment trends for various types of products and different types of borrowers.