Prime Rate
Interest rate banks charge most creditworthy customers. Usually Fed funds rate + 3%. Credit cards and HELOCs tied to prime rate.
What You Need to Know
Prime rate is the interest rate commercial banks charge their most creditworthy corporate customers. Typically set at Federal Funds Rate + 3%. Most consumer loans are priced relative to prime rate.
Current relationship (2024):
- Fed funds rate: 5.25-5.50%
- Prime rate: 8.50% (Fed funds + 3%)
Common uses:
- Credit cards: Prime + 13-20% = 21-28% APR
- HELOCs: Prime + 0-2% = 8.5-10.5%
- Business loans: Prime + 2-5%
- Variable-rate mortgages: Prime + margin
When Fed raises rates by 0.25%, prime rate increases 0.25%, and your variable-rate debts increase proportionally. HELOC at Prime + 1% goes from 8.5% to 8.75%.
Wall Street Journal publishes the most-used prime rate, based on rates from 70% of largest US banks. When 70%+ change their prime rate, WSJ updates the published rate.
Doesn't apply to: Fixed-rate mortgages, fixed student loans, savings accounts (though savings rates loosely follow prime).
Sources & References
This information is sourced from authoritative government and academic institutions:
- federalreserve.gov
https://www.federalreserve.gov/releases/h15/
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Related Terms in Economics
Federal Funds Rate
Interest rate banks charge each other for overnight loans. Set by Federal Reserve. Controls all other interest rates—mortgages, credit cards, savings.
Inverted Yield Curve
Short-term bonds pay higher rates than long-term bonds. Recession predictor—has preceded every recession since 1950, usually by 12-24 months.
Market Correction
10-20% market decline from recent peak. Healthy and common—happens every 1-2 years. Not as severe as 20%+ bear market.
Recession
Economic downturn with declining GDP, rising unemployment, and reduced spending. Technically 2 consecutive quarters of negative GDP growth.
Stagflation
Stagnant economy with high inflation—worst of both worlds. Rising prices + high unemployment + no growth. Rare but devastating.
Yield Curve
Graph showing bond yields across different maturities. Normal = upward slope (long-term pays more). Inverted = recession warning.