Prime Rate

The prime rate is the benchmark interest rate that U.S. commercial banks use as a starting point when setting rates for variable-rate loans, credit cards, and home equity lines of credit. It is not set by the Federal Reserve directly. Instead, individual banks set their own prime rates, and in practice virtually all major U.S. banks set theirs at exactly 3 percentage points above the federal funds rate target established by the Federal Open Market Committee. As of June 23, 2025, the prime rate was 7.50% in the United States.

Think of the prime rate as the reference peg on which most variable lending rates are hung.

How the Prime Rate Is Determined

The Federal Reserve sets a target for the federal funds rate, the overnight rate at which banks lend reserves to each other. Banks respond by adjusting their prime rates in lockstep. The 300-basis-point spread between the federal funds rate and the prime rate has remained stable for decades.

The Wall Street Journal surveys the 25 largest U.S. banks by domestic assets and publishes the prime rate when at least 70% of those banks have set an identical rate. This published rate is the most widely cited benchmark and the one used in most consumer loan contracts that reference "the prime rate."

What the Prime Rate Affects

The prime rate directly influences the cost of a wide range of consumer and business credit products.

• Credit cards: Most variable-rate credit cards price their annual percentage rates as the prime rate plus a fixed margin. If you carry a balance at prime plus 15%, and the prime rate rises from 7.50% to 8.00%, your credit card rate moves from 22.50% to 23.00% automatically.
• Home equity lines of credit: These revolving credit lines are almost universally priced as the prime rate plus a spread. They reprice monthly or quarterly as the prime rate changes, making them highly sensitive to Federal Reserve rate decisions.
• Small business loans: Many small business lines of credit and short-term commercial loans use the prime rate as their base, with the final rate set at prime plus a margin reflecting the borrower's credit risk.
• Adjustable-rate student loans: Some private student loans use the prime rate as their index, though the Secured Overnight Financing Rate has displaced prime as the most common reference rate for newer variable-rate products.

Prime Rate vs. Federal Funds Rate vs. Discount Rate

These three rates are related but distinct. The federal funds rate is what banks charge each other for overnight loans of reserve balances. The discount rate is what the Federal Reserve charges banks that borrow directly from its discount window. The prime rate is what banks charge their most creditworthy business customers for short-term loans.

The prime rate is the only one of the three that directly affects retail consumer borrowing costs in most loan contracts.

Historical Perspective

The prime rate hit its all-time high of 21.5% in December 1980 as the Federal Reserve under Chairman Paul Volcker aggressively tightened monetary policy to break the inflation of the late 1970s. It hit its post-2008 low of 3.25% as the Federal Reserve held the federal funds rate near zero from December 2008 to December 2015. The rate cycle from 3.25% in March 2022 to 8.50% in July 2023 was the fastest tightening cycle since the Volcker era, reflecting the Federal Reserve's campaign against the post-pandemic inflation surge.

Sources

• https://www.federalreserve.gov/faqs/credit_12846.htm
• https://en.wikipedia.org/wiki/Prime_rate
• https://www.bankrate.com/rates/interest-rates/prime-rate/