A basis point is one one-hundredth of a percent, or 0.01%. Lenders, investment firms, and the Federal Reserve use basis points to describe small changes in interest rates, yields, and fees with more precision than percentages allow. One hundred basis points equals one full percentage point, and the unit is often abbreviated “bps” and spoken as “bips.”
What a Basis Point Is
In decimal form, one basis point is 0.0001. It is the smallest increment commonly used in financial documents, and it exists because interest rates and fees often move in fractions of a percent. Fifty basis points is half a percent. Twenty-five basis points is a quarter of a percent. You will see the term on mortgage disclosures, credit card agreements, mutual fund prospectuses, and Federal Reserve announcements.
Converting Basis Points to Percentages
The math is simple. To turn basis points into a percentage, divide by 100. To turn a percentage into basis points, multiply by 100.
- 1 basis point = 0.01% (0.0001)
- 10 basis points = 0.10% (0.0010)
- 25 basis points = 0.25% (0.0025)
- 50 basis points = 0.50% (0.0050)
- 100 basis points = 1.00% (0.0100)
If a lender tells you your rate is rising by 75 basis points, that is a 0.75% increase. If the news reports a quarter-point rate cut by the Federal Reserve, that is 25 basis points.
Why Basis Points Instead of Percentages
Percentages carry an ambiguity that basis points remove. If someone says a 5% interest rate “increased by 1%,” that could mean the new rate is 6% (an absolute increase of one percentage point) or 5.05% (a relative increase of 1% of the original rate). Those two outcomes produce very different costs for a borrower.
Basis points leave no room for either reading. A 100-basis-point increase always means the rate moved up by exactly one percentage point, from 5% to 6%. A 5-basis-point increase always means the rate moved from 5% to 5.05%. That is why loan documents, investment disclosures, and central bank statements rely on basis points.
Where You Will See Basis Points
Mortgage and Loan Rates
Mortgage rates are quoted and adjusted in basis points, and small changes add up. On a $300,000, 30-year mortgage, a 25-basis-point rate increase adds roughly $50 to your monthly payment and thousands of dollars in interest over the life of the loan.
Adjustable-rate mortgages tie your rate to a benchmark index and add a fixed margin expressed in basis points. For loans indexed to the Secured Overnight Financing Rate, which replaced LIBOR as the standard benchmark for consumer adjustable-rate loans, the lender’s margin typically runs between 100 and 300 basis points above the index.1Freddie Mac Single-Family. SOFR-Indexed ARMs If the index sits at 3.5% and your contract specifies a 200-basis-point margin, your rate is 5.5%.
Credit Card APRs
Credit card issuers adjust Annual Percentage Rates in basis points, especially for variable-rate cards tied to an index. A card priced at the benchmark plus 1,200 basis points sits 12% above the index. A 50-basis-point increase in the index raises your APR by 0.50%, which raises the interest on any balance you carry.
Under Regulation Z, a card issuer generally cannot increase your APR unless an exception applies, such as a variable rate moving with its index or a promotional rate expiring. When an increase does occur, the issuer must give you written notice at least 45 days before the change takes effect.2Consumer Financial Protection Bureau. Comment for 1026.55 – Limitations on Increasing Annual Percentage Rates
Investment Fees
Fund expenses are almost always quoted in basis points. A mutual fund or ETF with an expense ratio of 15 basis points charges 0.15% of your invested assets each year. A fund charging 75 basis points costs five times as much. The SEC requires every mutual fund to disclose fees in a standardized fee table in its prospectus so investors can compare.3SEC.gov. Mutual Fund Fees and Expenses These costs come straight out of your return, so a gap of 20 or 30 basis points compounds into real money over decades.
Bond investors also use basis points to measure the yield spread between two bonds. A corporate bond might yield 150 basis points more than a Treasury bond of the same maturity. If that spread widens to 250 basis points, markets are pricing in more risk; if it narrows, confidence is rising.
Savings Accounts and CDs
Basis points matter on deposits too. A savings account paying 440 basis points (4.40%) earns far more than one paying 22 basis points (0.22%). On a $10,000 deposit, a 400-basis-point gap works out to roughly $400 more in annual interest. When comparing accounts, convert the basis-point difference into dollars to see what the choice is actually worth.
The Federal Reserve
The Federal Open Market Committee sets a target range for the federal funds rate, the rate banks charge each other for overnight lending, and announces changes in basis points. As of January 29, 2026, the target range sits at 3.50% to 3.75%, following a 25-basis-point cut in December 2025.4The Federal Reserve. The Fed Explained – Accessible: FOMC’s Target Federal Funds Rate or Range These moves ripple through mortgages, car loans, and credit card APRs. A single 25-basis-point change sounds trivial but affects trillions of dollars in outstanding debt, which is why the Fed usually moves in measured increments rather than large jumps.
Basis Points vs. Discount Points
These two terms sound alike and appear on the same documents, but they measure different things. Basis points describe a change in an interest rate: 25 basis points equals a 0.25% rate change. Discount points are an upfront fee paid at closing, calculated as a percentage of the loan amount. One discount point on a $300,000 mortgage costs $3,000, and it typically reduces your interest rate by about 25 basis points.5Internal Revenue Service. Publication 936, Home Mortgage Interest Deduction When you review a Loan Estimate or Closing Disclosure, confirm which one the document is referring to. Treating a rate change as an upfront fee, or the other way around, leads to very different financial expectations.
The 12.5-Basis-Point Accuracy Rule for Loan Disclosures
Federal law uses basis points to define how accurate a lender’s disclosed APR must be. Under Regulation Z, which implements the Truth in Lending Act, a disclosed annual percentage rate is considered accurate if it falls within 12.5 basis points, or one-eighth of one percentage point, of the actual rate.6Consumer Financial Protection Bureau. 1026.14 Determination of Annual Percentage Rate A disclosure that misses by more than that is inaccurate under federal law.
That matters because the Truth in Lending Act gives borrowers the right to sue a creditor who fails to comply with disclosure requirements. In an individual lawsuit involving a mortgage or other loan secured by your home, a court can award actual damages plus statutory damages between $400 and $4,000, along with attorney’s fees. For open-ended credit such as a credit card, statutory damages range from $500 to $5,000.7Office of the Law Revision Counsel. 15 U.S. Code 1640 – Civil Liability Knowing how basis points translate to percentages lets you check whether the APR on your loan documents sits within that 12.5-basis-point window, and gives you a concrete standard to point to if something looks off.