Prime Rate
The interest rate commercial banks charge their most creditworthy customers, based on the federal funds rate.
What is Prime Rate?
The prime rate is a benchmark interest rate that US commercial banks use as a starting point for pricing many consumer and business loans — including credit cards, home equity lines, and variable-rate mortgages. It is traditionally set at the federal funds rate plus 3 percentage points. When the Federal Reserve raises or lowers the federal funds rate, the prime rate moves in lockstep. The Wall Street Journal publishes a consensus prime rate based on the rates reported by the ten largest US banks. Borrowers with excellent credit may receive rates at or near prime; riskier borrowers are charged prime-plus a spread.
Example
When the Fed raised the federal funds rate to 5.25–5.50% in 2023, the prime rate climbed to 8.50% — its highest since 2001. Variable-rate credit card APRs, which are typically prime + 13–17%, reached 21–26% for average cardholders.