Prime rate
A benchmark interest rate banks use as a base for many consumer and business loans, moving closely with Federal Reserve policy.
What it means
The prime rate is a reference rate that banks use to price many variable-rate loans. Credit card APRs and home equity lines of credit are often set as prime plus a margin. The most widely cited version is a survey-based average of what large U.S. banks charge.
Prime is not set by the government, but banks move it in step with the Federal Reserve. For many years it has typically sat about 3 percentage points above the top of the federal funds target range, so when the Fed raises or cuts rates, prime and the variable loans tied to it usually change within days.
Example
Suppose the prime rate is 8% and your credit card APR is prime plus 14 percentage points, or 22%. If the Fed cuts rates and prime drops to 7.5%, your card’s APR would fall to 21.5%.
How it’s used
- Understanding why credit card and HELOC rates change
- Reading loan agreements that quote rates as prime plus a margin
- Following how Federal Reserve decisions reach consumers
Related terms
Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.