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.
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Finance: How Do Credit Card Companies Wo...116 Views
finance a la shmoop. how do credit card companies work? you could write a
book on this but don't. it'll hurt instead think about a credit card [man carries huge book and grimaces]
company is kind of twisted moneylender who really makes money in two ways.
well first they make money from the people who take your credit cards like
when you use your credit card to lovingly pay shmoop 20 bucks a month for our
awesome content. thank you very much. that $20 charge carries about a 1% hit. from
the credit card company that is the hard-working elves here at shmoop only
keep about nineteen dollars and 80 cents from that twenty you just paid. credit [equation]
card companies need to pay for their jets right? well that one transaction was
just 20 cents but there are gujilion's of them so the dough adds up to billions
and billions really fast. unless do you think the job of being a credit card
company is easy, note that every few thousand transactions is done by some
bad actor like no different kind of bad actor. you know meaning of theif someone
behaving badly they've stolen your card and if race to Best Buy [man runs out of store carrying TV]
hoping to abscond with ten flat screens to sell on the street corner and make a
fast buck. while the credit card company is generally responsible for those
frauds against mankind and have to hunt down the bad guys .so that's one way
they make money. the other way credit card companies get paid is that they get
money from consumers who use them either directly or indirectly directly. means
something like an annual fee. and then there are charges well you know that is
if you don't pay off your credit card bill each month you carry what is called [credit card rates listed]
a balance. and on those amounts you pay huge interest. like for many buyers on
credit the fee is 15 to 20 percent per year these days and sometimes more. so if
you bought a thousand dollar television set with your 20% credit card and didn't
pay it off for three years you'd have paid $200 a year in interest for three
years or $600. do you think Visa Mastercard or Amex pay 20% interest for
the money they borrow to lend to you? hardly they pay very very low interest
rates like just a few percent in there so on the [visa employees pictured]
20% they charge you an interest to punish you for not paying off your
credit card their cost is more like 2% I either making like an 18% spread or
profit margin on that money. the 600 bucks you paid for renting the grand for
3 years from the kindly loving people at visa
Oh made visa over 500 bucks on that money nice. work if you can get it and [equation]
you know a really nice jet.