prime rate

Prime Rate

The prime rate is a benchmark interest rate that banks typically use as a starting point when setting rates on many types of loans and lines of credit. In the United States, it is generally defined as the federal funds rate plus 3 percentage points. The federal funds rate is the rate set by the Federal Reserve for overnight lending between banks, so when the Fed moves that rate up or down, the prime rate usually follows.

Most major U.S. banks publish the same prime rate, and the Wall Street Journal tracks and publishes a widely cited version based on what the majority of the country’s largest banks are charging. In most cases, when you see a loan or credit card offer tied to the prime rate, the lender is adding a margin on top of it to determine your actual interest rate.

Why It Matters

The prime rate directly affects the cost of borrowing for everyday consumers. Variable-rate products such as home equity lines of credit (HELOCs), credit cards, and certain personal loans are typically indexed to the prime rate. This means when the prime rate rises, the interest you pay on those products generally rises as well, sometimes within a single billing cycle.

Understanding the prime rate can help you make smarter decisions about when to borrow, when to pay down variable-rate debt, and how changes in Federal Reserve policy might affect your monthly payments.

Example

Suppose you have a credit card with an interest rate described as “prime plus 14.99%.” If the current prime rate is 8.50%, your card’s annual percentage rate (APR) would be 23.49%. If the Federal Reserve raises rates and the prime rate increases to 9.00%, your APR would adjust to 23.99%. That half-point increase may seem small, but over time and across a large balance, it can meaningfully increase the total interest you pay.

Related Terms

• Federal funds rate: The interest rate at which banks lend money to each other overnight, set by the Federal Reserve. It is the primary driver of the prime rate.
• Annual percentage rate (APR): The yearly cost of borrowing expressed as a percentage, including interest and certain fees.
• Variable interest rate: An interest rate that can change over time, often tied to a benchmark like the prime rate.
• HELOC (Home Equity Line of Credit): A revolving credit line secured by your home, typically carrying a variable rate tied to the prime rate.
• Benchmark rate: A standard interest rate used as a reference point for pricing loans and other financial products.