What is the prime rate, and how does it affect you?

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The prime rate is an important benchmark interest rate that can affect how much you pay to borrow money. Banks use the prime rate to help set rates on credit cards, home equity lines of credit (HELOCs), personal loans, and other forms of variable-rate debt.

Understanding how the prime rate works — and why it changes — can help you anticipate changes in your borrowing costs and make smarter decisions about your debt.

What is the prime rate, and how does it work?

The prime rate, also known as the Wall Street Journal prime rate or U.S. prime rate, is the interest rate at which banks lend money to their most creditworthy customers.

Individual banks set their own prime rates, and the Wall Street Journal publishes an aggregate rate set by at least 70% of the country's 10 largest banks. This Wall Street Journal prime rate provides a benchmark that banks can use to set rates on various loan products. Currently, the prime rate is 7%.

You can think of the prime rate as a reference point for consumer loan interest rates. For example, a higher prime rate means higher credit card interest rates, adjustable-rate mortgage rates, and personal loan rates. However, banks use additional factors, including the borrower's credit history, to determine individual interest rates. Generally, the better your credit, the lower your loan interest rate — and the closer your rate will be to the prime rate.

The prime rate isn't fixed; it changes in response to the federal funds rate. Typically, the prime rate is about 3 percentage points higher than the upper range of the federal funds rate. For example, if the upper end of the federal funds target range were 3.5%, the prime rate would be about 6.5%. Inflation and other economic factors can also affect the prime rate.

The prime rate fluctuates over time in response to various factors that affect the economy, including wars, recessions, and global events. It reached a high of 21.5% in 1980 due to rampant inflation. It was the lowest at 3.25% in 2008 during the Great Recession, and again in 2020 during the COVID-19 pandemic economic response. Today, the prime rate is 7%.

Here's a snapshot of the prime rate over the past 10 years:

Because banks use the prime rate as a reference point for setting interest rates, the prime rate directly influences a variety of loan interest rates, including personal loans, home equity products, mortgages, credit cards, and more.

Some loans — like certain personal loans and mortgages — have fixed rates, meaning their interest rates don't change throughout the loan's term. Others, such as credit cards, have variable rates that can change at any time.

If you have an outstanding variable-rate loan, such as a home equity line of credit (HELOC) or credit card, an increase in the prime rate can lead to a bump in your interest rate — and, therefore, a higher monthly payment. If you have an existing fixed-rate loan, a change in the prime rate won't affect your current interest rate or payments. But it will affect the rates of any new fixed-rate loans you take out.

Generally speaking, a higher prime rate leads to higher interest rates, making it more expensive to borrow. Your individual credit history also affects the interest rates you qualify for, but the prime rate acts as a starting point.

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