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

The prime rate is not set by any single authority. Instead, it is determined by the largest U.S. banks based on the federal funds rate — the rate the Federal Reserve sets for banks to lend to each other overnight. When the Federal Reserve raises or lowers its rate, banks typically adjust the prime rate within a day or two. The prime rate then becomes the baseline that banks use to calculate interest on credit cards, home equity lines of credit, adjustable-rate mortgages, and business loans.

The prime rate matters to you because it directly affects what you pay to borrow money. If you have a credit card with a variable interest rate, your rate is usually the prime rate plus a percentage that the bank adds based on your credit history. When the prime rate goes up, your rate goes up. When it goes down, yours does too — though banks sometimes move faster on increases than decreases.

As of early 2024, the prime rate has been in the range of 8.25% to 8.50%, though this changes as the Federal Reserve adjusts its own rate. You can find the current prime rate in the Wall Street Journal's Money Rates table or on most major bank websites.

Key Takeaways

  • The prime rate is what banks charge their best customers and serves as the starting point for calculating rates on credit cards, home equity lines, and adjustable mortgages.
  • Banks set the prime rate based on the federal funds rate, which the Federal Reserve controls, so changes at the Federal Reserve level flow through to consumer borrowing costs within days.
  • A variable-rate credit card or loan means your interest rate moves up and down with the prime rate, while a fixed-rate product stays the same regardless of prime rate changes.
  • The prime rate affects savings accounts less directly — most savings rates are set by individual banks and do not automatically track the prime rate the way borrowing rates do.

How the Federal Reserve's rate connects to the prime rate

The Federal Reserve does not set the prime rate directly. Instead, it sets the federal funds rate — the interest rate at which banks lend reserve balances to each other overnight. This rate is a target range, not a fixed number. The Fed announces a range (for example, 5.25% to 5.50%), and banks trade overnight loans within that range.

The prime rate follows the federal funds rate because banks use the overnight lending market as a reference point for all their other rates. When the Fed raises the federal funds rate target, banks know their own borrowing costs have gone up, so they raise the prime rate. The adjustment usually happens within one business day of a Fed announcement. When the Fed cuts rates, banks typically lower the prime rate just as quickly.

This chain matters because the prime rate then cascades down to you. Your credit card issuer looks at the prime rate, adds a margin (usually 8% to 12% depending on your creditworthiness), and that becomes your annual percentage rate (APR). If the prime rate rises by 0.5%, your card's APR rises by 0.5% too.

Which borrowing products track the prime rate

Not all loans and credit products move with the prime rate. Variable-rate products are tied to it; fixed-rate products are not.

Credit cards almost always have variable rates. When you sign up, the bank quotes you a rate that is the prime rate plus your margin. As the prime rate changes, your rate changes automatically — the bank does not have to ask your permission or send you a new agreement. This is why credit card rates have risen significantly since the Federal Reserve began raising rates in 2022.

Home equity lines of credit (HELOCs) are also variable and tied to the prime rate. The rate you pay is typically prime plus 1% to 3%, depending on your credit and the lender. Adjustable-rate mortgages (ARMs) are variable too, though they may be tied to a different index than the prime rate — some track the Secured Overnight Financing Rate (SOFR) instead.

Fixed-rate mortgages, fixed-rate personal loans, and fixed-rate auto loans do not move with the prime rate. When you lock in a rate on these products, it stays the same for the life of the loan, regardless of what happens to the prime rate or the federal funds rate.

Why banks use the prime rate as a reference point

The prime rate exists because banks need a standard reference that all lenders understand. Without it, each bank would set its own baseline rate, and there would be no way for borrowers to compare costs across lenders or for the market to function smoothly.

The prime rate is also a signal of bank health and lending conditions. When the prime rate is high, it means the Federal Reserve is trying to slow the economy and reduce inflation. Banks pass that cost along to borrowers. When the prime rate is low, the Fed is trying to stimulate borrowing and spending, and banks lower their rates to encourage loans.

The largest banks — JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo — effectively set the prime rate by announcing what they will charge their most creditworthy customers. Other banks watch these announcements and adjust their own prime rates to match. The Wall Street Journal publishes the consensus prime rate based on what the majority of these large banks are charging.

How the prime rate affects savings accounts

The prime rate has less direct impact on savings accounts than it does on borrowing. Banks set savings account rates based on their own funding needs and competitive pressure, not automatically based on the prime rate. However, the prime rate and the federal funds rate do move in the same direction, and when the Fed raises rates, banks often raise savings rates too — just not always by the same amount.

During periods when the Federal Reserve is raising rates, you may see savings account rates climb. But banks tend to raise savings rates more slowly than they raise credit card rates, and they cut savings rates faster than they cut credit card rates. This is because banks make more profit when the gap between what they pay depositors and what they charge borrowers is wide.

Money market accounts and certificates of deposit (CDs) are more likely to track rate changes than traditional savings accounts, because they are marketed as alternatives to each other and compete on rate. If you are shopping for a savings product, compare rates across banks rather than assuming the prime rate tells you what you will earn.

What happens when the prime rate changes

When the Federal Reserve announces a rate change, the prime rate typically adjusts within one business day. For variable-rate products, your rate changes automatically — you do not need to do anything. Your credit card issuer will update your rate in their system, and your next statement will reflect the new APR.

For products with a grace period or a promotional rate, the change applies only after that period ends. For example, if you have a 0% introductory APR on a credit card for 12 months, the prime rate change does not affect you until month 13.

If you have a HELOC or an ARM, the timing of the rate change depends on the terms of your agreement. Some adjust when ready when the prime rate changes. Others adjust only on an anniversary date or quarterly. Check your loan documents to see when your rate resets.

The difference between the prime rate and other benchmark rates

The prime rate is one of several benchmark rates that lenders use. The SOFR (Secured Overnight Financing Rate) is increasingly used for mortgages and other long-term loans. The LIBOR (London Interbank Offered Rate) was historically used for many loans but is being phased out. The federal funds rate is what the Federal Reserve controls directly.

For most consumer borrowing — credit cards, HELOCs, and some adjustable mortgages — the prime rate is the relevant benchmark. For mortgages originated after 2021, SOFR is more common. If you are not sure which rate your loan tracks, check your promissory note or call your lender.

Frequently Asked Questions

Does the prime rate affect my fixed-rate mortgage?

No. A fixed-rate mortgage has an interest rate that was set when you took out the loan and does not change, regardless of what happens to the prime rate or the federal funds rate. Only adjustable-rate mortgages (ARMs) move with market rates.

How often does the prime rate change?

The prime rate changes only when the Federal Reserve changes the federal funds rate. The Fed meets eight times per year to decide whether to raise, lower, or hold rates steady. The prime rate can stay the same for months or years if the Fed does not move.

Can I lock in a rate before the prime rate goes up?

For fixed-rate products like mortgages and personal loans, yes — the rate you lock in at process stays the same. For variable-rate products like credit cards, no — the rate is set by the bank and changes automatically with the prime rate. You cannot lock in a credit card rate.

Why did my credit card rate go up if I did not miss a payment?

If your card has a variable rate, it went up because the prime rate went up. The bank automatically increases your APR when the prime rate increases. This is not a penalty — it is how variable-rate products work.

Is the prime rate the same at every bank?

Yes, the prime rate itself is the same across all banks — it is published by the Wall Street Journal and is based on what the largest banks are charging. However, the margin that each bank adds on top of the prime rate varies by lender and by your creditworthiness.