The prime rate is the interest rate that banks charge their most creditworthy customers for loans

The prime rate is a baseline number that major U.S. banks use to set the interest rates they offer to customers. It is not a rate you will see advertised directly — instead, banks add a percentage on top of it when they quote you a rate for a credit card, home equity line of credit, or adjustable-rate mortgage.

The prime rate itself is set by the Federal Reserve, the central banking system of the United States. The Fed does not announce a single "prime rate" number. Instead, the Fed sets a target range for the federal funds rate — the rate at which banks lend reserve balances to each other overnight. Major banks then use that Fed target as the basis for their own prime rate, which typically sits about 3 percentage points above the Fed's target.

When the Fed raises or lowers its target, the prime rate moves with it within a few days. When the prime rate changes, any loan or credit product tied to it will eventually change too — though the timing depends on the type of account you have.

Key Takeaways

  • The prime rate is set by major banks based on the Federal Reserve's federal funds rate target, and it changes when the Fed changes its target.
  • Banks use the prime rate as a starting point, then add their own margin to set the actual rate they charge you on credit cards, home equity lines, and adjustable-rate mortgages.
  • Credit cards tied to the prime rate can change monthly, while adjustable-rate mortgages typically adjust once or twice per year depending on the loan terms.
  • The prime rate affects borrowing costs across the economy, so it matters whether you are shopping for a loan or deciding between fixed and adjustable rates.

How the prime rate connects to what you actually pay

When a bank quotes you an interest rate, it is usually the prime rate plus a markup called the spread or margin. For example, if the prime rate is 5.50% and a bank's margin on credit cards is 15%, your card's rate would be 20.50%.

The spread varies by product and by bank. A customer with excellent credit might get a smaller spread on a home equity line of credit than a customer with fair credit. A bank's margin on credit cards is typically much larger than its margin on mortgages because credit cards carry more risk — the bank has no collateral if you stop paying.

When the prime rate moves, the spread usually stays the same. So if the prime rate rises from 5.50% to 5.75%, your credit card rate would rise from 20.50% to 20.75%. The bank's margin remains 15%.

Which products are tied to the prime rate

Credit cards are almost always tied to the prime rate. The rate on your card is called the APR, or annual percentage rate. When the prime rate changes, your card's APR can change as soon as the next billing cycle — usually within one to two months.

Home equity lines of credit (HELOCs) are also typically tied to the prime rate. These are revolving credit accounts secured by your home's equity. Like credit cards, they can adjust monthly or quarterly depending on the lender's terms.

Adjustable-rate mortgages (ARMs) use the prime rate or a related index as their benchmark, though the adjustment schedule is different. An ARM might have a fixed rate for the first three, five, or seven years, then adjust annually or semi-annually after that. The adjustment schedule is set when you take out the loan.

Home equity loans can be fixed-rate or adjustable. If you have an adjustable home equity loan, it will move with the prime rate on whatever schedule your loan documents specify.

Savings accounts and money market accounts are not directly tied to the prime rate, but banks often raise the rates they pay on savings when the Fed raises the prime rate, because the Fed's actions affect the overall interest rate environment.

Why the Federal Reserve changes the prime rate

The Federal Reserve raises the prime rate when it wants to slow down borrowing and spending in the economy — usually because inflation is too high. Higher rates make loans more expensive, so fewer people borrow, and spending slows.

The Fed lowers the prime rate when it wants to encourage borrowing and spending — usually because the economy is weak or unemployment is high. Lower rates make loans cheaper, so more people borrow, and spending increases.

The Fed does not change the prime rate every month. It meets eight times per year to review economic conditions and decide whether to change its target. Between meetings, the prime rate stays the same unless the Fed calls an emergency meeting, which is rare.

Fixed-rate loans are not affected by prime rate changes

If you have a fixed-rate mortgage, a fixed-rate home equity loan, or a fixed-rate personal loan, changes to the prime rate do not affect your interest rate. The rate you locked in when you took out the loan stays the same for the entire life of the loan, regardless of what happens to the prime rate.

This is why fixed-rate mortgages are popular when rates are low — you keep that low rate even if the prime rate rises later. It is also why adjustable-rate mortgages offer a lower starting rate: the bank is taking on the risk that rates will rise, and it compensates by offering you a discount upfront.

Where to find the current prime rate

The Wall Street Journal publishes the prime rate daily based on the rates that major banks are charging. You can find it on the Journal's website, or search "prime rate" in any search engine to see the current number.

The Federal Reserve's website publishes the federal funds rate target, which is the number the prime rate is based on. The Fed's target is usually about 3 percentage points below the prime rate.

Your bank or credit card issuer will tell you the prime rate they are using and the margin they are charging you. This information is in your loan documents or account agreement. If you cannot find it, call your lender and ask for the index and margin on your account.

How prime rate changes affect your monthly payment

For credit cards and HELOCs, a change in the prime rate affects the interest you owe on your balance, but it does not change your minimum payment structure. If you carry a balance, you will pay more interest when the prime rate rises and less when it falls.

For adjustable-rate mortgages, a rate adjustment can change your monthly payment significantly. If your ARM adjusts upward, your payment goes up. If it adjusts downward, your payment goes down. The adjustment happens on the schedule set in your loan documents — often annually after the initial fixed period ends.

For home equity lines of credit, the payment structure depends on the specific account. Some require you to pay interest only during the draw period, while others require principal and interest payments. When the prime rate changes, the interest portion of your payment changes, and the total payment may change too.

Frequently Asked Questions

Does the prime rate affect savings account interest?

Not directly. Banks set savings rates based on their own decisions and market conditions, not automatically tied to the prime rate. However, when the Federal Reserve raises rates, the overall interest rate environment improves, and many banks do raise the rates they pay on savings accounts. The timing and amount vary by bank.

What is the difference between the prime rate and the federal funds rate?

The federal funds rate is the rate the Federal Reserve targets for banks to charge each other on overnight loans. The prime rate is what major banks charge their best customers, and it is typically about 3 percentage points higher than the federal funds rate. Banks use the prime rate as the starting point for rates on credit cards, HELOCs, and other consumer products.

If I have a fixed-rate mortgage, do I need to worry about the prime rate?

No. Your fixed rate will not change no matter what happens to the prime rate. You only need to monitor the prime rate if you have an adjustable-rate mortgage, a credit card, a HELOC, or another product with a variable rate tied to it.

Can I lock in the prime rate on my credit card?

No. Credit card rates are variable by design — they move with the prime rate. You cannot lock in a fixed rate on a credit card. If you want a fixed rate, you would need to pay off the card and use a fixed-rate personal loan instead, though that is a different product with different terms.

How often does the prime rate change?

The prime rate changes only when the Federal Reserve changes its federal funds rate target. The Fed meets eight times per year to decide whether to change rates. Between meetings, the prime rate stays the same. In some years the Fed makes multiple changes; in others it makes none.