Capital One's earnings call Wednesday underscored the fact that just because the Fed cut interest rates earlier this week doesn't mean consumers will find it any easier to borrow money. While banks can borrow more cheaply, they are worried that consumers won't be able to pay them back. So, in Capital One's case at least, it is lending to fewer customers or, in some cases, charging them more.
The company's top executives told analysts that particularly in Capital One's auto loan business, they had experienced an "unacceptable" degree of charge-offs because borrowers were unable to pay back loans. As a result, chief executive Richard Fairbank said the company was no longer lending to the riskiest subset of borrowers. Even for prime borrowers—those deemed low-risk—the standards have risen. On average, the credit scores of Capital One's prime borrowers were 30 points higher in the fourth quarter of 2007 compared with a year earlier.
In other words, if your credit score is less than impressive, you might have a tough time borrowing money to buy that new Jeep.
"In general, [auto loans] are performing poorly. The industry, as a whole, relaxed terms in the 2004-2006 time period. And now they're tightening back up," says Moshe Orenbuch, research analyst at Credit Suisse.
Fairbank added that the financial services provider had increased loan pricing—that is, it is charging higher fees or rates—"to build more resilience into our loan portfolios." Another reason not to expect the Fed cut to provide relief to your own debt portfolio anytime soon.