What Is the Prime Rate?

How Is the Prime Rate Determined?

The prime rate closely follows the federal funds target rate, which is set by the Federal Open Market Committee (FOMC) of the Federal Reserve. This is the rate banks charge one another when lending on an overnight basis. As of May 2025, the federal funds rate is 4.25% to 4.50%.

Most banks set their prime rate about 3 percentage points higher than the federal funds rate. So, when the Fed adjusts its target rate, banks typically follow suit and raise or lower their prime rate within a few days. For example, if the upper limit of the federal funds target rate is 4.50%, it's expected that the prime rate will be around 7.50%.

While this 3% spread is common, individual banks may slightly set different rates depending on market conditions and competition.

One of the most commonly cited prime rates is the one published in the Wall Street Journal. It's updated when the prime rates posted by 70% of the 10 largest U.S. banks change.

Historical Prime Rate Trends

The prime rate has fluctuated significantly over the years in response to economic conditions and Federal Reserve policy:

• Early 1980s: The prime rate reached a record high of 21.50% in December 1980 as the Federal Reserve raised interest rates to fight high inflation.
• 1990s: The '90s started with a mild recession. The prime rate was cut to 6.00% in July 1992, then gradually bounced back as the economy grew stronger. With the growth of the dot-com boom, the prime rate reached 8.50% by the end of 1999.
• Early to mid-2000s: The prime rate slowly fell to 4.00% by June 2003 as the Fed lowered rates to fight a recession brought on by the dot-com bust. As the economy recovered, the Fed raised rates, and the prime rate reached 8.25%, just before the housing market crashed.
• 2008 to 2015: In response to the global financial crisis and the Great Recession, the Fed cut rates to near zero. The prime rate fell to 3.25% in December 2008—the lowest it had ever been—and stayed there for seven years, until December 2015.
• 2020: The Fed again cut rates to near zero. The prime rate fell to 3.25% in March 2020 to soften the economic impact of lockdowns and unemployment spikes brought on by the COVID-19 pandemic.
• 2022 to 2023: As the economy recovered and inflation surged, the Fed raised rates aggressively. By the time rate hikes ceased in late 2023, the prime rate had risen to around 8.50%.
• 2025: As of May 2025, the prime rate remains relatively high at 7.50%.

Prime Rate Historical Trend

How Does the Prime Rate Impact You?

Changes to the prime rate can influence how much you pay to borrow money, or how much you earn on your savings. The impact varies depending on the type of financial product.

Credit Cards

Most credit cards have variable interest rates that are tied to the prime rate. Your annual percentage rate (APR) is usually calculated as the prime rate plus a margin determined by your card issuer.

Example: If your card's terms are the prime rate plus 15% and the prime rate is 7.50%, your APR would be 22.50%.

When the prime rate changes, your credit card APR usually adjusts within one to two billing cycles. This can affect how much interest you pay on balances you carry month to month.

Adjustable-Rate Mortgages

Some adjustable-rate mortgages (ARMs) are tied to the prime rate, which means your interest rate and monthly mortgage payment may change periodically as the prime rate changes. If rates go up, your payments could increase. It's important to understand your mortgage terms and how often your rate adjusts.

Learn more: Common Types of Adjustable-Rate Mortgages

Personal Loans

Changes to the prime rate could directly affect the rates offered on new personal loans. Variable-rate personal loans may adjust with the prime rate even after they are issued. If your loan has a variable rate, expect your monthly payments to rise or fall when the prime rate moves. These are less common than fixed-rate personal loans.

Home Equity Lines of Credit

Home equity lines of credit (HELOCs) almost always have a variable rate and are directly linked to the prime rate. As the prime rate increases, so does the cost of borrowing from your line of credit. This can lead to higher monthly interest payments if you're carrying a balance.

Savings Accounts

Savings account interest rates aren't directly linked to the prime rate, but they are influenced by it. When the prime rate rises, banks may offer higher yields to attract deposits and stay competitive, especially online banks that offer high-yield savings accounts.

Existing Loans

If you already have a fixed-rate loan—like a fixed-rate mortgage or auto loan—your interest rate won't change when the prime rate changes. However, if you're shopping for a new loan, today's prime rate will influence the rates you find.

Tip: If your credit score is in good shape, consider refinancing high-interest rate loans when the prime rate drops. You may qualify for lower rates and reduce your monthly payments.

Frequently Asked Questions

The Bottom Line

While you can't control the prime rate, you can control your credit. Maintaining a good credit score gives you the best chance of qualifying for competitive interest rates in any economy.

Check your FICO^® Score^☉ and credit report regularly, pay your bills on time, and keep your credit utilization low to stay in the best position possible as the prime rate fluctuates.