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If you pay attention to financial news, you may have heard the term “prime rate” and wondered what it meant. You might have even confused it with the federal funds rate or your loan’s interest rate.
Though related, these aren’t all the same. The prime rate is the interest rate banks charge their best customers. It’s based on the federal funds rate and influences interest rates on loans, mortgages, and more.
Learn more about what the prime rate is, where it comes from, and how it affects your wallet.
The prime rate, also known as the Wall Street Journal prime rate or U.S. prime rate, is the interest rate at which banks lend money to their “best” — or most creditworthy — customers.
Individual banks set their own prime rates, and the Wall Street Journal publishes an aggregate rate set by at least 70% of the country’s 10 largest banks. This Wall Street Journal prime rate provides a benchmark that banks can use to set rates on various loan products. Currently, the prime rate is 7.50%.
You can think of the prime rate as a reference point for consumer loan interest rates. For example, a higher prime rate means higher credit card interest rates, adjustable-rate mortgage rates, and personal loan rates. However, banks use additional factors, including the borrower’s credit history, to determine individual interest rates. Generally, the better your credit, the lower your loan interest rate — and the closer your rate will be to the prime rate.
The prime rate isn’t fixed; it changes in response to the federal funds rate. Typically, the prime rate is about 3 percentage points higher than the federal funds rate. For example, if the federal funds rate is 2.50%, the prime rate would be about 5.50%. Inflation and other economic factors can also affect the prime rate.
Read more: Federal funds rate: What it is and how it affects you
The prime rate fluctuates over time in response to various factors that affect the economy, including wars, recessions, and global events. Here’s a snapshot of the prime rate over the last five years:
While the last five years saw an increase in the prime rate that eventually peaked at 8.50%, this rate doesn’t come close to the historical high. In December of 1980, the prime rate peaked at an all-time high of 21.50% in response to rampant inflation. This was followed by several years of a double-digit prime rate, which finally dropped below 10% in 1985.
Because banks use the prime rate as a reference point for setting interest rates, the prime rate directly influences a variety of loan interest rates, including personal loans, home equity products, mortgages, credit cards, and more.
Some loans — often personal loans and mortgages — have fixed rates, meaning their interest rates don’t change throughout the loan’s term. Others, such as credit cards, have variable rates that can change at any time.
If you have an outstanding variable-rate loan, such as a home equity line of credit (HELOC) or credit card, an increase in the prime rate can lead to a bump in your interest rate — and, therefore, a higher monthly payment. If you have an existing fixed-rate loan, a change in the prime rate won’t affect your current interest rate or payments. But it will affect the rates of any new fixed-rate loans you take out.
Generally speaking, a higher prime rate leads to higher interest rates, making it more expensive to borrow. Your individual credit history also affects the interest rates you qualify for, but the prime rate acts as a starting point.
Read more: 10 tips to improve your credit score in 2025