The prime rate is the best interest rate you can get, and it's influenced by the economy.
When you apply for a financial product, including credit cards, personal loans and auto loans, lenders will charge you interest based on what kind of risk you pose to them. Borrowers with a prime credit score(usually 660 and above) are more likely to receive prime, or favorable, terms.
But what exactly the prime rate is fluctuates based on changes in the economy, such as a recession like the one brought about by the coronavirus pandemic.
While some factors are outside of your control, you can still be informed about the current prime rate and how banks decide on it. Below, Select breaks down what you need to know about the prime rate and how it affects your finances.
What is the current prime rate?
The prime rate is 3.25% as of July 2020, according to the Fed. This is the lowest rate in the past year and since 2008.
How is the prime rate determined?
The prime rate isn't determined by the Fed, but instead by individual banks. However, the prime rate is influenced by something called the federal funds rate, which is set by the Federal Open Market Committeeconsisting of twelve Fed members.
The federal funds rate is the rate banks charge each other for short-term loans. It is currently 0% to .25%. Banks use this rate as a starting point to set the prime rate for consumers. The prime rate is often roughly 3% higher than the federal funds rate (and currently 3.25%).
The Fed meets roughly eight times a year to discuss potential adjustments to the federal funds rate, based on the economy's current conditions. For instance, the Fed announced two emergency rate cutsin March to help combat the negative economic impact of the coronavirus. These rate cuts resulted in a decrease in the federal funds rate, which in change lowered the prime rate and the interest rate for many consumer financial products.
How does the prime rate affect you?
While the interest rate on most financial products is dependent on the prime rate, the actual rate you receive is rarely the same exact amount. Typically, your interest rate is above the prime rate, but the amount can be greater depending on the lender. For instance, the average credit card APR on accounts assessed interest is currently 15.78%— the prime rate plus 12.53%.
Of course, most credit cards set variable ranges for interest rates, meaning you can receive an APR anywhere on a preset scale, such as 12% to 24%.Consumers with excellent credit will likely qualify for rates as low as 12%, whereas someone with good credit may receive rates closer to 24%.
When prime rate changes (as a result of the Fed changing the federal funds rate), your credit card APR also fluctuates. The change follows the same pattern as the prime rate — meaning a decrease in the prime rate results in a decrease in your card's APR. The exact change in your interest rate depends on how much the prime rate changes— take for instance, the two recent adjustments that resulted in .50% and 1% APR reductions. A 1% decrease means a 14.99% variable APR would decrease to 13.99%. This change often takes one to two billing cycles.
Fixed-rate financial products, such as many personal loans and auto loans, won't fluctuate since you lock in your interest rate when you open the loan.
Bottom line
While the prime rate affects the interest rate lenders set for financial products, you can still influence the rate you receive by improving your credit score. The higher your credit score, the better (and lower) interest rates you'll receive on existing accounts with variable rates, as well as new account openings.
Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
FAQs
The prime rate, in turn, is based on the federal funds rate. Also known as The Wall Street Journal prime rate or the U.S. Prime Rate, it's a benchmark set and used by financial institutions to determine how much interest to charge a bank's customers on loans. Typically, it's about 3% higher than the federal funds rate.
Who benefits from prime rate? ›
The prime rate is the current interest rate that financial institutions in the U.S. charge their best customers. These customers have excellent credit, and are eligible for this optimal rate because their loans carry the lowest risk for their financial institutions.
How does the prime rate work and how it affects businesses? ›
If a small business has a loan with an interest rate based on the prime rate, an increase in the prime rate may lead to an increase in the interest rate on the loan, resulting in higher loan payments for the business.
What does it matter if the prime rate goes up? ›
The change in the prime rate will affect the amount of interest you pay if your rate is variable. Financial institutions that offer low-interest or small business credit cards will have a rate of prime plus a certain percentage. Your interest rate will rise or fall depending on which way the prime rate goes.
What happens when the Fed raises the prime rate? ›
The Fed raises interest rates to slow the amount of money circulating through the economy and drive down aggregate demand. With higher interest rates, there will be lower demand for goods and services, and the prices for those goods and services should fall.
How to explain prime rate? ›
The prime rate is an interest rate determined by individual banks. It is often used as a reference rate (also called the base rate) for many types of loans, including loans to small businesses and credit card loans.
What is the difference between the Fed rate and the prime rate? ›
Generally, the prime rate is about 3 percent higher than the federal funds rate. That means that when the Fed raises interest rates, the prime rate also goes up. The prime rate is the rate at which individual banks and credit unions lend to their customers, including large corporations.
Who benefits from higher interest rates? ›
As interest rates rise, the interest income from loans typically increases faster than the interest paid on deposits, leading to wider profit margins. Additionally, higher interest rates can boost the earnings of insurance companies and investment firms, as they often hold large portfolios of interest-sensitive assets.
What is the highest prime rate in history? ›
What was the highest prime rate? The highest prime rate was 21.5%, reached on December 19, 1980.
Why is prime rate higher than fed rate? ›
While the federal funds rate is used by banks to lend to each other, the prime rate is used as a benchmark rate for banks and other lenders to determine the rates they charge consumers. The prime rate, which is set by the largest lending and financial institutions, is usually 3% higher than the federal funds rate.
What Is the Current Prime Rate? As of November 1, 2023, the current prime rate is 8.50%, according to The Wall Street Journal's Money Rates table. This source aggregates the most common prime rates charged throughout the U.S. and in other countries. The federal funds rate is currently 5.25% to 5.50%.
What is the prime interest rate right now? ›
The current Bank of America, N.A. prime rate is 8.50% (rate effective as of July 27, 2023).
What happens when prime rate goes down? ›
When prime rate changes (as a result of the Fed changing the federal funds rate), your credit card APR also fluctuates. The change follows the same pattern as the prime rate — meaning a decrease in the prime rate results in a decrease in your card's APR.
Who controls the prime rate? ›
Every six weeks, the Federal Reserve evaluates the economy and determines if the rate should go up, down, or remain the same. A change in the prime rate can affect credit cards, home equity lines of credit, student loans, and savings accounts.
How does prime rate affect mortgage rates? ›
Can the prime rate affect your mortgage payments? The higher or lower the prime rate tends to go, the more likely it is that the cost of credit card or adjustable-rate mortgage payments will go up or down as well.
What are the disadvantages of increasing interest rates? ›
Higher interest rates typically slow down the economy since it costs more for consumers and businesses to borrow money. But while higher interest rates can make it more expensive to borrow and could hamper overall economic growth, there are also some benefits.
Who would be affected by prime rate? ›
Every six weeks, the Federal Reserve evaluates the economy and determines if the rate should go up, down, or remain the same. A change in the prime rate can affect credit cards, home equity lines of credit, student loans, and savings accounts.
Does Prime have any benefits? ›
The following are some of the benefits of Amazon Prime. FREE Two-Day Shipping on eligible items to addresses in the contiguous US and other shipping benefits. For more information, go to Amazon Prime Shipping Benefits. FREE Same-Day Delivery in eligible zip codes.
