The prime rate is the interest rate that U.S. commercial banks charge their most creditworthy borrowers, and it currently sits at 6.75%.1Board of Governors of the Federal Reserve System. Selected Interest Rates (Daily) – H.15 For everyone else, it works as a benchmark: banks price credit cards, home equity lines, and many business loans as “prime plus” a margin, so when the prime rate moves, your rate on those products moves with it.
What the Prime Rate Is
Banks reserve the prime rate for their lowest-risk corporate clients. Those are typically large companies with strong balance sheets and a long record of paying debts on time. Because default risk is minimal, these borrowers get the cheapest credit a bank offers.
Almost no individual consumer pays the prime rate itself. Instead, it functions as the floor on top of which lenders add a spread. That is why a credit card agreement describes your APR as something like “prime plus 14 points” rather than a fixed number. A quarter-point shift in the prime rate ripples through millions of these contracts at once.
The prime rate most contracts reference is the one published by the Wall Street Journal, which surveys the 30 largest U.S. banks and updates its figure when at least 23 of them change their rate. The Federal Reserve tracks a parallel figure based on the top 25 domestically chartered commercial banks.1Board of Governors of the Federal Reserve System. Selected Interest Rates (Daily) – H.15 In practice the two numbers are the same, because the major banks move in lockstep.
How the Prime Rate Is Set
Banks don’t choose the prime rate independently. It follows a simple formula tied to the federal funds rate, which is the rate banks charge each other for overnight loans. The Federal Open Market Committee sets a target range for the federal funds rate at its eight scheduled meetings each year.2Board of Governors of the Federal Reserve System. Federal Open Market Committee Meeting Calendars and Information The prime rate is the upper end of that range plus a fixed 3 percentage points.
The current federal funds target range is 3.50% to 3.75%.3Board of Governors of the Federal Reserve System. Federal Reserve FOMC Minutes – January 2026 Add 3 points to the top, and the prime rate lands at 6.75%. That 3-point cushion has held steady for decades. When the FOMC raises or lowers its target by 25 or 50 basis points, banks move prime by the same amount, usually the same day. Once you know what the Fed did, you can predict almost exactly what will happen to your variable-rate borrowing costs.
Which of Your Loans Move With the Prime Rate
Not every loan tracks the prime rate. Knowing which ones do tells you where to watch when the Fed acts.
Credit Cards
Most variable-rate credit cards are priced as prime plus a fixed margin. That margin has climbed sharply over the past decade. The Consumer Financial Protection Bureau found that the average credit card margin reached 14.3 percentage points above prime, pushing average card APRs to 22.8%.4Consumer Financial Protection Bureau. Credit Card Interest Rate Margins at All-Time High At a 6.75% prime rate, a card carrying a 14-point margin charges you roughly 21% APR. A half-point Fed cut drops that to about 20.5%. The margin, not the prime rate, is where most of your cost actually lives.
Home Equity Lines of Credit
HELOCs are among the most prime-sensitive products consumers hold. Rates adjust as prime changes, often monthly. Federal rules require your lender to disclose a maximum lifetime rate at account opening, so there is a ceiling on how high the rate can go.5Consumer Financial Protection Bureau. 12 CFR Part 1026 – Regulation Z – Section 1026.40 Requirements for Home Equity Plans
Small Business and SBA Loans
Many small business loans are written as prime-plus agreements. SBA 7(a) loans, the most common federally backed small business loan, cap how far above prime the lender can go:
- Loans over $350,000: prime plus 3.0%
- $250,001 to $350,000: prime plus 4.5%
- $50,001 to $250,000: prime plus 6.0%
- $50,000 or less: prime plus 6.5%
A $400,000 SBA 7(a) loan today pays no more than 9.75%.6U.S. Small Business Administration. 7(a) Loan Program Terms, Conditions, and Eligibility Variable SBA rates can adjust as often as monthly, with the first change allowed on the first calendar day of the month after disbursement.7eCFR. 13 CFR 120.214 – What Conditions Apply for Variable Interest Rates
What the Prime Rate Does Not Cover
Adjustable-rate mortgages generally do not track prime. Most ARMs now use the Secured Overnight Financing Rate, published each morning by the Federal Reserve Bank of New York, which replaced LIBOR as the dominant benchmark for mortgages and many commercial lending products. Your credit card rate moves with prime, but your ARM moves with SOFR, and the two don’t always shift by the same amount at the same time. Fixed-rate loans, including fixed-rate mortgages and personal loans, don’t move at all when the Fed acts.
What a Prime Rate Change Costs You
The arithmetic is simple. When the Fed moves rates by a quarter point, prime moves by a quarter point, and every variable-rate product tied to prime shifts by the same amount on the next adjustment date.
On a credit card carrying a $5,000 balance, a quarter-point drop saves you about $12.50 a year. Barely noticeable. On a $100,000 HELOC balance, the same quarter-point move is worth roughly $250 a year. Stack several moves in the same direction and the swing grows quickly. Between 2022 and 2023, the prime rate climbed from 3.25% to 8.50%, more than doubling the interest cost on every variable line tied to it.
Why You Pay More Than Prime
Your actual rate is prime plus a margin that reflects how risky the lender considers you. Credit scores drive most of that assessment. Borrowers with scores above 740 generally qualify for the lowest available margins, while those in the 580 to 669 range are typically classified as subprime and face significantly higher spreads. A top-tier borrower might pay prime plus 10 points on a card; a subprime borrower might pay prime plus 18 or more. Debt-to-income ratio, employment stability, and credit history also factor in.
When a lender charges you a higher rate because of your credit report, federal law requires written notice. The Risk-Based Pricing Rule mandates a disclosure explaining that your terms are less favorable than most consumers receive, and the notice must include the credit score used, the possible score range under that model, and the top four factors dragging your score down.8Federal Trade Commission. Using Consumer Reports for Credit Decisions – Adverse Action and Risk-Based Pricing Notices If you receive one, treat it as a direct roadmap to a lower margin next time.
Protections When Your Rate Goes Up
Variable rates create real exposure, but federal rules put limits on how a lender can raise your costs.
Credit card issuers generally must give 45 days’ advance notice before raising the interest rate on new purchases.9Consumer Financial Protection Bureau. When Can My Credit Card Company Increase My Interest Rate One major exception applies: if your card has a variable rate tied to a public index like the prime rate, the issuer can raise your rate without advance notice when the index goes up.10eCFR. 12 CFR 1026.55 – Limitations on Increasing Annual Percentage Rates That provision catches most cardholders off guard. Check your card agreement for the words “variable rate” or “prime plus” to see whether it applies to you.
Every HELOC agreement must specify a maximum APR that can apply over the life of the plan, covering both the draw period and any repayment period.5Consumer Financial Protection Bureau. 12 CFR Part 1026 – Regulation Z – Section 1026.40 Requirements for Home Equity Plans The ceiling can be expressed as a flat number, such as 18%, or as a spread above the starting rate. Either way, know yours before you draw against the line.
For any variable-rate loan, lenders must disclose upfront how a rate increase will affect your payments, whether that means larger payments, more payments, or a bigger final balloon.11Consumer Financial Protection Bureau. 12 CFR Part 1026 – Regulation Z – Section 1026.18 Content of Disclosures The disclosure sits in your initial loan documents and should describe the worst-case scenario. If you signed a HELOC or variable-rate business loan and cannot find it, ask your lender for a copy.