For example, if a credit card issuer has charged off $1.4 billion of credit card debt during the year, and it has $100 billion of average credit card debt outstanding, its credit card charge-off rate is 1.4%. The charge-off rate can be determined with charge-offs from different time periods, such as monthly or quarterly. Then, that month’s or quarter’s charge-offs are annualized (multiplied by 12 in the case of a month or four in the case of a quarter). Then, the total amount of charge-offs for the year is divided by the total credit card debt outstanding in order to calculate the annual charge-off rate. So if a credit card issuer’s charge-offs for a given month are $100 million and its average credit card debt outstanding is $100 billion, the annualized amount would be $1.2 billion ($100 million multiplied by 12). So, the issuer’s credit card charge-off rate would be 1.2%.
How Credit Card Charge-Off Rates Work
When a credit card account becomes six months past due, the credit card issuer closes the card and charges off the account. A charge-off does not absolve the customer of the debt, but the charge-off is reflected as a loss in the issuer’s financial statements. These charge-offs are divided by the credit card issuer’s average outstanding credit card debt in order to determine its charge-off rate. Charge-off rates are net, meaning that any recoveries of previously charged-off amounts reduce the charge-off rate. Several factors affect the charge-off rate, including broader economic conditions. Charge-off rates tend to decline in better economic times and rise when the economy struggles. As of the first half of 2021, the nationwide credit card charge-off rate is 2.39%. In the years following the 2008 financial crisis, credit card charge-off rates exceeded 10%. Credit card charge-offs are essentially a loss for the credit card issuer, so companies strive to minimize their charge-off rate. If an issuer believes its charge-off rate is too high, it may take credit tightening actions such as increasing minimum required credit scores to qualify for its credit cards. After the Great Recession of 2008, credit card issuers largely used the unemployment rate to attempt to predict their credit card charge-off rates. However, some have argued that this analysis is insufficient and that other macroeconomic indicators should also be used to predict credit card charge-off rates.
Credit Card Charge-Off Rate vs. Credit Card Delinquency Rate
A related metric to the credit card charge-off rate is the credit card delinquency rate. The delinquency rate, however, is calculated by dividing the amount of credit card balances 30 or more days past due by the current (not average) credit card debt outstanding. So, if on a given day a credit card issuer has $100 billion credit card debt outstanding and has $1.7 billion of accounts delinquent by 30 days or more, its delinquency rate would be 1.7%.
