The prime rate is the base interest rate that U.S. commercial banks charge their most creditworthy borrowers, and as of December 2025 it sits at 6.75%. Banks set it by taking the top of the Federal Reserve’s federal funds rate target and adding 3 percentage points, so every Fed rate decision flows almost immediately into what you pay on credit cards, home equity lines of credit, and small business loans tied to prime.
How Banks Arrive at the Number
No government agency sets the prime rate. It emerges from the banks themselves. The Federal Reserve describes it as “an interest rate determined by individual banks” that “is often used as a reference rate (also called the base rate) for many types of loans, including loans to small businesses and credit card loans.”1Board of Governors of the Federal Reserve System. What Is the Prime Rate, and Does the Federal Reserve Set the Prime Rate?
The most widely cited version is published by the Wall Street Journal, defined as the base rate posted by at least 70% of the 10 largest U.S. banks. When seven of those banks change their rate, the Journal publishes the new figure. The Federal Reserve’s H.15 statistical release tracks the same measure across the 25 largest banks, and the two numbers almost always match.1Board of Governors of the Federal Reserve System. What Is the Prime Rate, and Does the Federal Reserve Set the Prime Rate?
The mechanical link to Fed policy is simple. The Federal Open Market Committee sets a target range for the federal funds rate, the rate banks charge each other for overnight loans.2Federal Reserve Bank of New York. Effective Federal Funds Rate Banks take the top of that range and add a fixed 3-point spread. With the current fed funds target at 3.50% to 3.75%, the math is 3.75 plus 3, which is 6.75%.1Board of Governors of the Federal Reserve System. What Is the Prime Rate, and Does the Federal Reserve Set the Prime Rate? A quarter-point Fed cut produces a quarter-point drop in prime, often on the same day. That predictability is what makes prime useful for planning around FOMC meetings.
What the Prime Rate Costs You on Real Loans
Variable-rate loans are priced as prime plus a margin, and that margin stays fixed for the life of the loan while the prime portion moves with the Fed. The margin reflects your credit profile, the collateral, and the lender’s risk assessment.
HELOCs
Home equity lines are the most common prime-linked product for homeowners. A typical HELOC might be priced at prime plus 1 or 2 points, which works out to 7.75% or 8.75% at today’s prime. A quarter-point Fed move usually flows through to your HELOC rate within one or two billing cycles.
Credit Cards
Most variable-rate cards tie their APR to prime, but the margins are far larger than on secured products. The Consumer Financial Protection Bureau found the average credit card APR margin reached 14.3 percentage points above prime, pushing average rates on accounts carrying a balance above 22%.3Consumer Financial Protection Bureau. Credit Card Interest Rate Margins at All-Time High Your card agreement lists the exact margin, and that number typically stays put unless a late payment triggers a penalty rate.
Small Business and SBA Loans
Small business lines of credit are frequently pegged to prime, with spreads ranging from zero to several points depending on financial strength and collateral. SBA 7(a) loans also use prime as their base, and SBA rules cap how much a lender can charge above it. Those caps vary by loan size; smaller loans allow larger spreads to offset the fixed cost of servicing a small balance.4Federal Register. Maximum Allowable 7(a) Fixed Interest Rates
Prime Plus and Prime Minus Pricing
A well-secured commercial real estate loan to a strong borrower may be priced at prime minus half a point, so the borrower pays less than the published prime rate. A riskier unsecured business loan might be priced at prime plus 4 points. Prime is the objective anchor; the spread is where the bank’s judgment about your credit risk lives. When prime moves, every borrower in a “prime plus” or “prime minus” structure sees the same dollar change in their rate.
Protections When the Rate Moves Against You
Variable rates can climb quickly during a Fed tightening cycle, but a few structural rules limit how far and how fast.
Adjustable-rate mortgages typically carry three layers of caps. An initial adjustment cap limits the first change after the fixed period ends, commonly to 2 or 5 points. A subsequent adjustment cap restricts each later change to 1 or 2 points. And a lifetime cap ceilings the total increase over the life of the loan, most often 5 points above the starting rate.5Consumer Financial Protection Bureau. What Are Rate Caps With an Adjustable-Rate Mortgage (ARM), and How Do They Work? HELOCs and credit cards do not always include the same periodic caps, though many HELOC agreements set a lifetime ceiling.
Federal law also requires advance notice before your rate changes. Credit card issuers must give at least 45 days’ written notice of a significant change in terms. Home equity lenders must give at least 15 days.6eCFR. Part 226 Truth in Lending (Regulation Z) Those windows give you time to pay down the balance, refinance, or shop alternatives before the higher rate hits.
If a credit card statement shows an interest charge you believe is wrong, the Fair Credit Billing Act gives you 60 days from the date the statement was sent to dispute it in writing. The creditor must acknowledge the dispute within 30 days and resolve it within two billing cycles, or 90 days at most. During the investigation, the creditor cannot try to collect the disputed amount or close your account solely because you refused to pay it.7Office of the Law Revision Counsel. 15 USC Chapter 41, Subchapter I, Part D: Credit Billing
Prime Rate Compared to Other Benchmark Rates
Not every loan is priced off prime, and confusing benchmarks leads to misreading your own rate.
The federal funds rate is what banks charge each other for overnight loans. You never pay it directly; it sets the floor beneath what you do pay.2Federal Reserve Bank of New York. Effective Federal Funds Rate The discount rate is what banks pay to borrow from the Federal Reserve’s discount window when they cannot get funds elsewhere. Since March 2020, the primary credit rate at the discount window has been set equal to the top of the fed funds target range, which currently places it at 3.75%.8Board of Governors of the Federal Reserve System. Policy Tools – Discount Window
The Secured Overnight Financing Rate, or SOFR, replaced LIBOR as the dominant benchmark for large commercial lending and many adjustable-rate mortgages. SOFR is calculated from actual overnight Treasury repurchase transactions and has no built-in bank profit margin.9Federal Reserve Bank of New York. Secured Overnight Financing Rate Data In practice, SOFR tends to price larger and more sophisticated products such as adjustable-rate mortgages, commercial real estate loans, and derivatives, while prime remains the standard benchmark for credit cards, HELOCs, and small business lines. If you are not sure which one applies to you, your loan documents will say so.
Tax Treatment of Prime-Linked Interest
Whether the interest you pay on a prime-linked loan is tax-deductible depends on how you used the money, not on the fact that the rate is tied to prime.
HELOC interest is deductible only if you used the funds to buy, build, or substantially improve the home securing the loan. Spend HELOC proceeds on credit card debt, a vacation, or anything else unrelated to the property, and the interest is not deductible.10Internal Revenue Service. Real Estate (Taxes, Mortgage Interest, Points, Other Property Expenses) 2 The restriction, originally set to expire, has been made permanent. Combined mortgage and HELOC debt eligible for the deduction is capped at $750,000 for most filers, or $375,000 for married filing separately.
Businesses can generally deduct interest on prime-linked loans, but larger firms face a cap. Under Section 163(j), the deduction cannot exceed the taxpayer’s business interest income plus 30% of adjusted taxable income for the year, with any disallowed interest carrying forward.11Office of the Law Revision Counsel. 26 USC 163 – Interest Small businesses that meet the gross receipts test under Section 448(c) are exempt from this limitation entirely, so most small businesses with prime-linked lines of credit can deduct the full amount of interest paid.12Internal Revenue Service. Questions and Answers About the Limitation on the Deduction for Business Interest Expense
Credit card interest on personal spending is never deductible, regardless of the benchmark that sets the rate.
Where Today’s Rate Sits Historically
The prime rate has swung widely. It reached an all-time high of 21.50% on December 19, 1980, during the Fed’s campaign under Chair Paul Volcker to bring down double-digit inflation.13Federal Reserve Bank of St. Louis. Bank Prime Loan Rate Changes: Historical Dates of Changes and Rates At the other end, prime held at 3.25% from late 2008 through early 2022 as the Fed kept rates near zero after the financial crisis and again through the pandemic. Today’s 6.75% falls roughly in the middle of that historical range, though it remains well above the levels that defined the 2010s.