The prime rate is the interest rate that banks charge their most creditworthy customers for loans
The prime rate (also called the prime lending rate) is a baseline number that banks use to set the interest rates they charge on loans and credit products. Think of it as the starting point — the rate a bank offers to customers with excellent credit and a strong history of repaying debt. Banks then add extra percentage points on top of the prime rate depending on how risky they think a particular loan is.
The prime rate itself is not set by any single government agency. Instead, it is determined by the Federal Reserve, which is the central banking system of the United States. The Federal Reserve sets a target range for what it calls the federal funds rate — the rate at which banks lend money to each other overnight. Most banks then set their prime rate about 3 percentage points higher than the federal funds rate. When the Federal Reserve raises or lowers the federal funds rate, the prime rate typically moves in the same direction within a few days.
Key Takeaways
- The prime rate is the interest rate banks offer to their most creditworthy borrowers, and it serves as the baseline for most other loan rates.
- The Federal Reserve does not directly set the prime rate, but banks follow the federal funds rate the Federal Reserve controls, usually adding about 3 percentage points.
- When the Federal Reserve raises or lowers rates, the prime rate changes shortly after, which affects the cost of mortgages, credit cards, home equity loans, and other borrowing.
- Your personal interest rate will be higher than the prime rate because banks add extra percentage points based on your credit score, income, and the type of loan.
How the prime rate affects the loans you can get
The prime rate matters to you because it is the foundation for the interest rates you will actually pay. When you borrow money — whether through a mortgage, credit card, car loan, or home equity line of credit — the bank calculates your rate by taking the prime rate and adding a markup. That markup is called the spread or margin, and it depends on how risky the bank thinks you are as a borrower.
For example, if the prime rate is 8.5% and you have good credit, a bank might offer you a credit card at prime plus 8%, which equals 16.5%. Someone with poor credit might be offered prime plus 15%, which equals 23.5%. The difference comes from the bank's assessment of whether you are likely to pay back what you borrow. A person with a long history of on-time payments and low debt looks less risky than someone with missed payments or high existing debt.
Some loans are more directly tied to the prime rate than others. Credit cards, home equity lines of credit, and adjustable-rate mortgages move quickly when the prime rate changes. Fixed-rate mortgages and car loans are usually locked in at the rate you receive on the day you sign, so they do not change if the prime rate moves later.
Why the Federal Reserve changes the prime rate
The Federal Reserve raises and lowers the federal funds rate (and therefore the prime rate) to manage inflation and employment in the economy. When inflation is high — meaning prices for goods and services are rising quickly — the Federal Reserve typically raises rates to make borrowing more expensive. The idea is that if loans cost more, people and businesses will borrow less, spend less, and prices will stop rising so fast.
When the economy is weak and unemployment is high, the Federal Reserve usually lowers rates to make borrowing cheaper. Lower rates encourage people to take out mortgages, car loans, and business loans, which increases spending and hiring.
These decisions affect you directly. When rates go up, your credit card payments may increase if you carry a balance, and the interest you earn on a savings account might go up as well. When rates go down, borrowing becomes cheaper but the interest you earn on savings typically falls.
The difference between the prime rate and other rates you will see
Banks publish several different rates, and it is straightforward to confuse them. The federal funds rate is what banks charge each other for overnight loans — you will not borrow at this rate directly. The prime rate is what banks charge their best customers. The LIBOR rate (London Interbank Offered Rate) was historically used for some business and adjustable-rate loans, though it is being phased out in the United States.
Your personal rate will always be higher than the prime rate. Banks publish the prime rate so that borrowers can understand the baseline, but your actual rate depends on your credit score, income, employment history, the type of loan, and current market conditions. A bank might advertise "rates starting at prime plus 5%" for a particular product, but you may not receive that rate if your credit profile does not match their lowest-risk category.
How to find the current prime rate
The prime rate changes frequently — sometimes several times per year — so it is useful to know where to look for the current number. The Wall Street Journal publishes the prime rate daily in its Money and Investing section. You can also find it on financial news websites like CNBC, Bloomberg, or Yahoo Finance. Many bank websites also display the current prime rate on their lending pages.
The prime rate is public information and does not change between banks — all major banks use the same prime rate as their baseline. What differs between banks is the spread they add on top of it. One bank might offer a credit card at prime plus 8%, while another offers prime plus 10% for a customer with the same credit profile. Shopping around and comparing offers from multiple banks can save you money.
What happens when the Federal Reserve raises or lowers rates
The Federal Reserve typically meets eight times per year to decide whether to change the federal funds rate. When they announce a change, the prime rate usually adjusts within one or two business days. If you have a variable-rate loan — one where your interest rate can change — your rate will move up or down according to the terms of your loan agreement.
If you have a fixed-rate loan, the rate you locked in when you signed will not change, even if the prime rate moves. This is one reason fixed-rate mortgages and car loans are popular — you know exactly what your payment will be for the entire loan period. Variable-rate products like credit cards and home equity lines of credit offer lower starting rates but carry the risk that your rate (and your payment) could increase.
Frequently Asked Questions
Does the prime rate affect savings accounts?
Indirectly, yes. Banks often raise the interest rates they pay on savings accounts when the Federal Reserve raises the prime rate, though the increase is usually smaller than the rate increase itself. When the Federal Reserve lowers rates, savings account interest typically falls as well. The relationship is not automatic — different banks move at different speeds and by different amounts.
Can I borrow at the prime rate?
Almost certainly not. The prime rate is reserved for banks' most creditworthy customers — typically large corporations or people with excellent credit, substantial assets, and a long banking relationship. Even then, most individual borrowers will pay prime plus a spread. You can use the prime rate as a reference point to understand what your bank is charging you, but your actual rate will be higher.
What is the difference between the prime rate and APR?
APR (annual percentage rate) is the actual interest rate you pay on a specific loan or credit product. The prime rate is a benchmark that banks use to calculate APR. Your APR will be the prime rate plus the bank's markup for your risk level. APR also includes some fees, while the prime rate does not.
If the prime rate goes down, will my credit card interest rate go down?
If you have a variable-rate credit card, yes — your rate should decrease within one or two billing cycles after the prime rate drops. If you have a fixed-rate card (which is rare), your rate will not change. Check your credit card agreement to see whether your rate is variable or fixed, and contact your bank if you are unsure.