The prime bank rate is the interest rate that banks charge their most creditworthy customers for loans

The prime rate (also called the prime lending rate or prime bank rate) is a baseline interest rate set by major banks. It is not set by the government or Federal Reserve directly. Instead, it is determined by banks themselves, and most major U.S. banks move their prime rate in lockstep with changes to the Federal Reserve's benchmark interest rate, called the federal funds rate.

When you hear that "the Fed raised rates," what actually happens is banks raise their prime rate shortly after. The prime rate then becomes the starting point for almost every other interest rate you encounter: credit card rates, home equity lines of credit, adjustable-rate mortgages, and some savings accounts all tie back to it.

You will not borrow at the prime rate yourself unless you are a large corporation or have an exceptional credit history. Instead, your bank adds a margin (usually 2 to 10 percentage points) on top of the prime rate to calculate what you actually pay. The better your credit, the smaller that margin.

Key Takeaways

  • The prime rate is the interest rate banks use as a reference point for nearly all other consumer lending rates.
  • Banks set the prime rate themselves, but almost all major banks move it in line with Federal Reserve decisions about the federal funds rate.
  • Your actual interest rate on a credit card, home equity line, or adjustable mortgage will be the prime rate plus a margin that depends on your creditworthiness.
  • When the prime rate rises, variable-rate debts become more expensive; when it falls, they become cheaper.

How the prime rate connects to the Federal Reserve

The Federal Reserve does not set the prime rate, but it sets the federal funds rate—the interest rate at which banks lend reserve balances to each other overnight. The Fed's decisions about this rate ripple through the entire financial system.

When the Federal Reserve raises the federal funds rate, banks raise their prime rate within days. When the Fed cuts rates, banks cut their prime rate. The relationship is so consistent that the prime rate and federal funds rate move together, though they are not the same number. As of early 2024, the prime rate has typically been about 3 percentage points higher than the federal funds rate, but this spread can vary.

This matters to you because it means the prime rate changes several times a year whenever the Fed meets and makes a decision. If you have a variable-rate credit card or adjustable mortgage, your rate will change when the prime rate changes—usually within a billing cycle or two.

Who actually borrows at the prime rate

The prime rate is the floor for creditworthy borrowing. Banks reserve it for their best customers: large corporations, established businesses, and individuals with excellent credit scores (typically 740 or higher) and substantial assets.

If you have a credit card, you are almost certainly paying prime plus 8 to 21 percentage points, depending on your credit score and the card issuer's pricing. If you have a home equity line of credit (HELOC), you might pay prime plus 0.5 to 2 percentage points. A mortgage might be prime plus 2 to 4 percentage points for a fixed rate, or prime plus 0.5 to 2 points for an adjustable rate.

The gap between the prime rate and what you pay is called the spread or margin. This is how banks make money on lending: they borrow at or near the federal funds rate, lend at the prime rate to their best customers, and lend at prime-plus-spread to everyone else.

How prime rate changes affect your accounts and debts

If you carry a balance on a variable-rate credit card, a prime rate increase means your interest charges go up on your next billing cycle. The card's terms specify that your rate is "prime plus X%," so when prime moves, your rate moves automatically.

If you have a fixed-rate credit card or mortgage, prime rate changes do not affect you directly. Your rate is locked in and will not change unless you refinance or the loan terms specify otherwise.

If you have an adjustable-rate mortgage (ARM), a home equity line of credit (HELOC), or a variable-rate personal loan, a prime rate increase makes your monthly payment higher. Some ARMs have rate caps that limit how much the rate can rise in a single adjustment period or over the life of the loan, but the payment will still increase when the prime rate rises.

On the savings side, some high-yield savings accounts and money market accounts tie their rates to the prime rate or federal funds rate. When the prime rate rises, these accounts pay more interest. When it falls, they pay less. Fixed-rate savings accounts are not affected by prime rate changes.

Where to find the current prime rate

The Wall Street Journal publishes the prime rate daily in its Money and Investing section. You can also find it on the Federal Reserve's website, on financial news sites like CNBC or Bloomberg, or on your bank's website.

As of early 2024, the prime rate has been in the 8 to 8.5 percent range, but this changes whenever the Federal Reserve meets. The Fed typically meets eight times per year to review and adjust the federal funds rate.

Your bank is required to disclose the prime rate used to calculate your variable-rate loan or credit card in your account agreement or periodic statements. If you cannot find it, call your bank and ask what prime rate they use and what margin they add on top of it.

Why the prime rate matters even if you do not borrow at it

Even if you never borrow money, the prime rate affects you. It influences the rates banks offer on savings accounts, money market accounts, and certificates of deposit (CDs). When the prime rate is high, banks can afford to pay more on savings. When it is low, they pay less.

The prime rate also signals the direction of the economy. A rising prime rate usually means the Federal Reserve is trying to slow inflation and cool down economic activity. A falling prime rate usually means the Fed is trying to stimulate borrowing and spending. If you are thinking about taking out a loan or locking in a savings rate, knowing the direction of the prime rate can help you time your decision.

Frequently Asked Questions

Does the prime rate affect my fixed-rate credit card or mortgage?

No. A fixed rate is locked in and does not change when the prime rate changes. Only variable-rate products—credit cards with variable APR, adjustable-rate mortgages, HELOCs, and some personal loans—move with the prime rate.

How often does the prime rate change?

The prime rate changes whenever the Federal Reserve changes the federal funds rate. The Fed typically meets eight times per year, but it can hold emergency meetings if needed. Most prime rate changes happen within days of a Fed announcement.

Can my bank use a different prime rate than other banks?

No. The prime rate published by the Wall Street Journal is the standard used across the industry. All major banks use the same prime rate. What differs is the margin they add on top of it based on your creditworthiness.

If the prime rate goes down, will my credit card rate go down automatically?

Yes, if your card has a variable rate. Your card issuer is required to lower your rate when the prime rate falls. The change usually takes effect within one or two billing cycles. Check your card's terms to confirm it is variable-rate, not fixed.

What is the difference between the prime rate and the federal funds rate?

The federal funds rate is the interest rate the Federal Reserve targets for overnight lending between banks. The prime rate is what banks charge their best customers, and it is typically about 3 percentage points higher than the federal funds rate. Banks set the prime rate themselves, but they move it in line with Fed decisions.