Charge-Off Rate (Credit Card)

Credit cards are quick and easy to use. And that fact makes it very easy to spend well beyond what you can afford. Usually, that just means running a balance for awhile (or forever), but most people at least make their minimum payments. However, sometimes even this proves too much. Some relatively small percent of people file bankruptcy or just stop paying their credit card bills, which means the credit card company has to write off the loss. If the credit card company can't collect anything after about 180 days, they will write off the debt.

The amount of the bad debt is reported as a percentage of the company’s total outstanding balances. This figure is called the "charge-off rate." So, if Discover, for example, had $3,000,000 in charge offs for the month of March and $100,000,000 in total money owed by customers, their charge-off rate would be 3% ($3,000,000/$100,000,000).

Companies monitor their charge-off rate closely and investors use it as a key metric. The tighter a credit card’s lending standards are, the lower their charge-off rate will be. Investors look to see if a credit card company’s charge-off rate has remained stable over time, or is increasing or decreasing. In 2018 the Federal Reserve reported that credit cards have the highest charge-off rate of 3.65% compared to other loans at 0.84% in 2018. Which is part of why credit card interest is so high compared to most other loans.