If you’re trying to assess the health of consumer credit, you can look at a million and one different indicators.  Recently, we discussed delinquency rates (the ABA says they’re at record levels).  You can try to deduce the overall situation by monitoring creditor behavior (they’re killing accounts and increasing interest rates).  You can look at overall consumer debt numbers, the market performance of lender stocks, or just about anything else short of your tea leaves.  Right now, they’re all pointing in the same direction:  Yuck.

And this post won’t make you feel much better if you’re hoping for good news.  We’re going to discuss charge offs.  Not surprisingly, they’re up.

The term “charge offs” refers to credit card balances that lenders don’t expect to recover.  If the bank is in a position where they just can’t reasonably expect repayment (that usually happens after 180 days of delinquency), it falls into the charge off category.

The Wall Street Journal recently reported that “U.S. charge-offs climbed 65% in the second quarter to 10.45% from 6.38% a year earlier.”  That’s right, they went up by 65%!  Recently, Bank of America, CitiGroup and Capital One all reported hefty increases in their annual charge off numbers.

And it doesn’t look like a decrease is on the immediate horizon.  Moody’s Investors Service predicts that the ugly number will hover somewhere around the 11% mark (that’s a half point higher than where we already are) through 2010.

While I’m sure we can all imagine ways that the credit card companies could decrease that number, the experts don’t seem to believe that larger “macro” improvements are the only thing that can put a hard floor beneath the charge off percentages.  As The Wall Street Journal reported:

Managing director [of Fitch Ratings] Michael Dean said charge-offs will remain high until the unemployment rate starts falling and delinquencies decline. And senior director Cynthia Ullrich said the agency expects yet more record highs in charge-offs over the coming months.

And they’re not the only ones blaming larger economic conditions for the problems within the credit card industry.  Nicholas Storie at Credit.com notes that:

Analysts say one major factor causing financial stress is the employment rate, which rose to 9.7 percent last month, with many experts predicting it could surpass 10 percent later this year or in early 2010.

Between the actual charge off numbers, the projected future situation and the fact that the only way out seems to be a reversal of our common economic fortunes, this is pretty depressing stuff.  However, there are a handful of people providing a little lamplight at the end of the charge off tunnel.  We might see those charge off numbers slide downhill at some point if you believe a research paper from JP Morgan:

However, the outlook for fundamentals in the longer term remains positive, as a peak in unemployment and a recovery in the broader economy is in sight. In addition, issuers continue to support the trust as well as maintain their portfolios (e.g., re-pricing, tightening underwriting/servicing) and structural protection within the ABS structure remains more than adequate to absorb the higher losses,” the JP Morgan piece concluded.

At least one of the bigger enchiladas at Bank of America seems optimistic, too:

Meanwhile, some say that despite the rising charge-off figures, the U.S. economy is actually well on the road to recovery.

In a speech to investors in Japan, Bank of America CEO Ken Lewis explained that “banks always experience their worst losses long after an economic recovery is already under way.”

Another day, another indicator.  Another piece of evidence suggesting that the worst is yet to come for the credit card industry and for the people who are having a very tough time making their payments.