Prime Rate

The prime rate is the interest rate commercial banks charge their most creditworthy corporate customers, serving as a benchmark for many consumer and commercial loans. In the U.S., the prime rate typically runs 300 basis points above the federal funds rate. When the Fed raises rates by 0.25%, prime usually increases by the same amount within days. For example, with fed funds at 5.50%, prime would be 8.50%. Many variable-rate products are tied to prime: credit cards (prime + 10-20%), home equity lines (prime + 0-2%), and small business loans (prime + 2-5%). The Wall Street Journal publishes the consensus prime rate based on the 30 largest banks. While theoretically for best customers, few actually borrow at prime – it’s more commonly a reference rate. During the 2008 crisis, prime fell to 3.25%, its lowest level in history. Prime rate changes affect millions of borrowers immediately, making Fed decisions highly impactful for consumers.