Retail credit
What is net charge-off rate (NCO rate)?
Net charge-off rate is the annualized amount of loans charged off, less recoveries, divided by average loans outstanding during the period.
Formula
Net charge-off rate = (Gross charge-offs - Recoveries) / Average loans outstanding x 100, annualized
The net charge-off rate measures realized credit losses relative to the size of a loan portfolio. Gross charge-offs are reduced by recoveries collected on previously charged-off loans, and the result is divided by average outstanding loans for the period. Quarterly or monthly figures are usually annualized so they can be compared with annual results.
Lenders, investors and regulators use the net charge-off rate as the headline measure of credit losses, broken down by product, such as credit cards, auto loans and commercial loans. It is used in pricing, allowance estimates, budgeting and comparisons with peers. Because it lags delinquency, lenders read it together with 30+ delinquency and roll rates.
The rate depends on charge-off policy, so lenders that charge off earlier or later report different timing for the same economic losses. Debt sales, which can accelerate or replace recoveries, also affect results. Using period-end instead of average balances distorts the rate when portfolios are growing or shrinking quickly, and annualizing a single volatile quarter can overstate the trend.
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