September 17, 2021
Before you get excited about the thought of free shipping and other sweet perks, we’re not actually talking about Amazon Prime here. (Sorry!) The prime rate we’re referring to is the interest rate that commercial banks charge to their most dependable, typically corporate customers, and it’s primarily influenced by the state of the economy.
The prime rate plays a role in your interest rate for a consumer loan product, like a credit card or a car loan.
There are several factors that affect how the prime rate fluctuates. We’ll answer your burning prime rate questions here, starting with some prime rate history.
The very first prime rate was recorded by the Wall Street Journal at 1.75% on December 1, 1947. The WSJ remains the most widely-used source for the prime rate, which they’ve published every day since.
The broad formula for the prime rate is that it’s, on average, 3 percentage points higher than the federal funds rate. Both rates are influenced by fluctuations in the economy. The prime rate hit an all-time high of 21.50% in 1980.
The current prime rate is 3.25% (as of August 31, 2021). It’s been set at that percentage since March 15, 2020.
The prime rate, also called the prime interest rate or prime lending rate, serves as the basis for most other interest rates and is mainly determined by the federal funds rate. The federal funds rate is the interest rate set by the Federal Open Market Committee (FOMC) for commercial banks exchanging their reserves with each other overnight.
The FOMC consists of twelve members and meets around eight times per year. At the meetings, the state of the economy is assessed in depth and the federal funds rate is adjusted accordingly. The prime rate will then increase or decrease depending on the committee’s recommendations. The current federal funds rate is 0.25%.
One recent example of a change in the federal funds rate occurred in March of 2020. To help alleviate the negative economic impact of the coronavirus pandemic, the FOMC decided to cut the federal funds rate. As a result, the prime rate and interest rates for numerous consumer financial products decreased to cushion the economic blow.
The prime rate doesn’t change at regular intervals. In some cases, the prime rate won’t change for several years; the current rate has been the same since March 2020. There have been years when the prime rate changed several times within that year.
Many different types of U.S. lending institutions, including credit unions and commercial banks, use the prime rate as a pillar for pricing their lineup of financial products. The rate has a direct effect on other common interest rates, such as HELOC rates and adjustable-rate mortgages.
In light of this, the prime rate is known to be fairly consistent. But when the prime rate does change, financial products with variable or adjustable rates may also change.
The prime rate isn’t a law, it’s an index. Because of this, it’s possible to find a credit card or loan product with an interest rate that’s lower than the current prime rate. In fact, some businesses and lenders will offer below-prime-rate loans or lines of credit as a way of bringing in business from highly-qualified customers. This is a common practice with certain products like car loans, mortgages and HELOC.
It’s also important to note that there isn’t a separate prime rate for each U.S. state. When you see something like “Massachusetts prime rate,” or “Oregon prime rate,” it’s the same as the U.S. prime rate.
While the interest rate on most consumer loan products depends on the prime rate, it doesn’t determine the rate you’ll actually receive. Generally speaking, your interest rate will be higher than the prime rate, but your individual rate will vary depending on the lender, your credit history and other financial factors unique to you.
Most major credit cards set a variable range for interest rates, so you’ll receive an annual percentage rate (APR) that falls within their preset scale and is based on your credit score and other factors.
When the federal funds rate changes, thus changing the prime rate, your credit card APR will adjust to reflect that change — it will usually take one to two billing cycles to show up on your statement. It’s all tied together unless you have a fixed-rate financial product; in that case, the interest rate is locked in when you first open the account.
While the prime rate can affect interest rates on your credit cards, loans and lines of credit, remember that your own credit history still plays an important role.
Are you looking for a low-interest line of credit to help you get out of debt faster? Check out Tally† today to see if you qualify.
†To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) will be between 7.90% and 29.99% per year and will be based on your credit history. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 - $300.