Discover Financial Services said on Monday it will offer $500 million of common stock and use the proceeds to help repay $1.2 billion the credit card issuer received in government bailout funds.

Shares of Discover, which said it may also issue senior notes in the near future, fell 7.8 percent in extended trading after the bell.

The credit card company also reiterated that it expects net charge-offs to increase to between 8.5 percent and 9 percent in the third quarter. Discover reported charge-offs of 7.79 percent in the second quarter.

In an interview with Reuters in June, Discover Chief Executive David Nelms had said charge-offs -- the percentage of debt the company does not expect to be repaid -- could peak by the end of 2009 or 2010.

Net proceeds may partly be used to make capital contributions to the company's banking unit or repurchase preferred stock from the U.S. Treasury, the company said.

The company, which in March took $1.2 billion in funds from the U.S. Treasury's Capital Purchase Program (CPP), has said it plans to repay the funds as quickly as possible.

The fourth-largest U.S. credit card network will grant underwriters an option to purchase up to an additional 15 percent of the shares, depending on demand, it said in a statement.

Discover's stock had closed up 36 cents, or 3.6 percent, at $10.50 on the New York Stock Exchange. The shares have lost 26 percent of their value in the last 12 months.

J.P. Morgan Securities Inc is acting as sole book-running manager for both the common stock and proposed senior notes offerings.

(Reporting by Sweta Singh; Editing by Richard Chang)