Charge Off - Explained
What is a Charge Off?
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What is a Charge-Off?
A charged-off account refers to an account held by a creditor that has not been paid by a debtor. The creditor has stopped collection efforts and designated the debt as uncollectable.
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How does a Charge-Off Work?
Once a lender considers collection efforts to be hopeless, it would opt for a charge-off. This generally happens within six months (180 days) of the debtor not making any payments to the creditor. It is the role of the lender to determine whether a consumer debt is uncollectible. The unpaid debt is generally reported on the debtor's credit report. An adverse effect of a charge-off is compromised creditworthiness due to the negative information on the debtor's credit report. This may result in difficulty in getting a loan approval or obtaining a loan at a reasonable rate. Whenever a customer is paying arrears, the charge-off status is never removed from the consumer credit report. Instead, the situation is reported as paid. In such a case, the debt remains in the credit report for seven years.
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- Determinants of Non Performing Loans: Case of US Banking Sector, Saba, I., Kouser, R., & Azeem, M. (2012). The Romanian Economic Journal, 44(6), 125-136. This article explains to readers the determinants of non-performing loans by using US case studies. According to the authors, non-performing loan rates are the key influencers of bank survival. Factors affecting the loan rates have been outlines including macroeconomic measures and firm-level issues. However, the study conducted by the authors considers several independent variables including total loans, inflations, real GDP per capita, and non-performing loan ratio. The authors have concluded that the variable influence performance of a bank, and as such, banks should control and amend their credit advancement policy in line with these variables.
- An investigation of sex discrimination in commercial banks' direct consumer lending, Peterson, R. L. (1981). The Bell Journal of Economics, 547-561. This paper introduces the prejudicial discrimination model in the credit market. Using data representing 30,000 commercial bank consumer loans, the authors tested the efficacy of the model. The findings revealed that no systematic pattern of prejudicial sex discrimination was found even before the passage of the Equal Credit Opportunity Act (ECOA). Instead, banking institutions act like profit maximizers and making loans on equivalent terms equal to risky customers regardless of ECOA rules.
- The effect of consumer interest rate deregulation on credit card volumes, charge-offs, and the personal bankruptcy rate, Ellis, D. (1998). This article describes the impact of consumer interest rate deregulation on charge-offs, credit card volumes, and personal bankruptcy rate. The authors associated the rising US personal bankruptcy rate with the increasing level of credit card debts. Thus, the paper argues that the decision made by the Supreme Court in 1978 (Marquette) has influenced the credit card loans market in a way that has expanded the availability of credit and increase borrowers average risk profile. The author explains how the regulation has impacted the consumer lending rates including expansion of credit card availability, reduction in average credit quality, and personal bankruptcies increase.
- Commercial bank lending: process, credit scoring, and costs of errors in lending, Altman, E. I. (1980). Journal of Financial and Quantitative Analysis, 15(4), 813-832. This article describes the existing bank lending processes including the costs of lending errors. According to the author, the lending process involves a straightforward series of activities which involves two principal parties whose associations range from initial loan request to loan repayment (successfully or unsuccessfully). Commercial banking process is interdependent; however, the dependencies are rarely articulated in a rigorous manner. The paper, therefore, investigates the association between the two critical aspects of a lending process: credit evaluation state and events that describe and quantify charge-off.
- Credit card borrowing, delinquency, and personal bankruptcy, Stavins, J. (2001). New England Economic Review, 15-31. This study tests whether credit card lenders have an adverse selection problem, in which banks making worse credit card offers attract riskier customers with higher delinquency and charge off-rates compared to others. Using data of credit card issuers in the US between 1990 and 1999, the authors find that banks with higher interest rates have higher delinquency rates, but not charge-off rates. Additionally, banks with higher interest rates were doing to possess higher net revenues collected from credit card lending. As such, the authors conclude that it is still profitable to offer loans to riskier individuals, at least during the good times.
- Loan growth and loan quality: some preliminary evidence from Texas banks, Clair, R. T. (1992). Economic Review, Federal Reserve Bank of Dallas, Third Quarter, 1992, 9-22. This article explores the concepts of loan growth and loan quality using case studies from Texas banks. The authors illustrate the strong relationship between loan growth and the deterioration of loan quality in regards to the equity position of a bank. Based on the study conducted, the authors reported that rapidly growing banks that have high equity levels do not show any deterioration of loan quality. This supports the authors assertion that capital-based supervision programs help banks grow with loan growth.
- Bank examiner criticisms, bank loan defaults, and bank loan quality, Wu, H. K. (1969). The Journal of Finance, 24(4), 697-705. This article discusses the common loan default occurrences in a bank including bank loan defaults, bank loan quality, and bank examiner criticisms. The author explores several bank loan classifications including substandard, loss, and doubtful. Such classification, according to the author, represents expert judgments on bank loans which are considered useful in supervisory authorities and to economic and finance students.
- Effects of price competition in the credit card industry, Park, S. (1997). Economics Letters, 57(1), 79-85. This study examines the effects of credit card rates on the growth of card loan and delinquency rates. Using data from 1991 to 1994, the authors found that lower card rates do not increase card loans and that delinquency rates are positively related to card rates.
- Implicit recourse and credit card securitizations: What do fraud losses reveal?, Vermilyea, T. A., Webb, E. R., & Kish, A. A. (2008). Journal of Banking & Finance, 32(7), 1198-1208. This paper uses a model of implicit recourse to test the fraud losses of asset-backed securitizations. The authors asserted that securitized asset fraud losses are incurred by a bank and do not affect securitization trust performance. However, it is noted that credit losses affect the performance of trust and are borne by the securitized asset owner. Using 2001-2006, the authors found that the performance of the securitization of a credit card has a negative correlation with fraud losses that banks report.