The prime rate is the benchmark interest rate that U.S. banks charge their most creditworthy borrowers, and it directly sets what you pay on most variable-rate debt. As of March 2026, the prime rate is 6.75%, based on a federal funds target range of 3.50% to 3.75%.1Federal Reserve. Selected Interest Rates (Daily) – H.15 When the Federal Reserve moves its benchmark rate, the prime rate moves with it, and the effect reaches credit cards, home equity lines, and small business loans within days.
How the Number Is Set
The formula is simple. Take the upper bound of the federal funds target range and add 3 percentage points. With the target range at 3.50% to 3.75%, that produces a prime rate of 6.75%.1Federal Reserve. Selected Interest Rates (Daily) – H.15 Banks have used this 3-point spread since the second quarter of 1994.
Individual banks technically set their own prime rates, but they all anchor to the same federal funds rate, so in practice they move together. When a loan contract references “the prime rate,” it almost always means the rate published by The Wall Street Journal, which surveys the 30 largest commercial banks and only changes its published figure when at least 23 of them adjust. That three-quarters supermajority keeps any single bank from shifting the national benchmark and gives the WSJ rate the legal weight to serve as an independent index in variable-rate contracts.
Why the Fed Drives the Prime Rate
The Federal Open Market Committee never votes on the prime rate directly, but its decisions determine every move it makes. The FOMC meets eight times a year to weigh inflation, employment, and broader economic conditions.2Federal Reserve. Federal Open Market Committee Calendars Its primary inflation target is 2%. When inflation runs hot, the committee tends to raise the federal funds target range to cool spending; when the economy weakens, it cuts. Banks adjust their prime rates within hours of the announcement, keeping that fixed 3-point spread intact.
What the Dot Plot Suggests for 2026
Four times a year, the Fed publishes a Summary of Economic Projections that includes the dot plot, where each FOMC participant marks where they believe the federal funds rate should end each coming year. The March 2026 projections put the median federal funds rate at 3.4% by year-end, with a full range across participants of 2.6% to 3.6%.3Federal Reserve. Summary of Economic Projections, March 2026 If that median holds, the prime rate would fall to roughly 6.4% by late 2026. The longer-run median sits at 3.1%, translating to a prime rate near 6.1% once the economy reaches what participants consider steady state.
These dots are individual assessments of appropriate policy, not commitments. If inflation surprises upward or a recession takes hold, the actual path can diverge sharply.
What It Costs You on a Credit Card
Credit card issuers set your annual percentage rate by adding a fixed margin to the prime rate. If your margin is 15 percentage points and prime is 6.75%, your APR is 21.75%. Under Regulation Z, the issuer must disclose the index and the margin when you open the account.4eCFR. 12 CFR 1026.6 – Account-Opening Disclosures After an FOMC change, the adjustment typically shows up on your statement within one to two billing cycles.
The math adds up quickly. On a $10,000 revolving balance, a full percentage-point increase in the prime rate adds roughly $100 per year in interest. Across the several hikes in a typical tightening cycle, that stacks. Cuts work in the same direction without any action on your part.
What It Costs You on a HELOC
Home equity lines of credit are revolving accounts secured by your home, and they are the consumer product most tightly regulated around prime rate disclosures. Federal rules require your lender to tell you which index they use, how the margin is applied, and the maximum APR the plan can ever reach.5eCFR. 12 CFR 1026.40 – Requirements for Home Equity Plans
There is no single federal cap on how high a HELOC rate can go. Lenders must disclose whatever maximum they set, whether as a specific percentage or as a certain number of points above your initial rate.6Consumer Financial Protection Bureau. 12 CFR 1026.40 – Requirements for Home Equity Plans State usury laws may impose separate limits, but these vary widely. Before you sign, check the lifetime cap in your agreement, because that ceiling determines your worst-case monthly payment.
A Note on Private Student Loans
If you’re comparing private student loans, don’t assume they follow the prime rate. Most private student lenders now base their variable rates on the Secured Overnight Financing Rate rather than prime. Both track Fed policy, so the underlying dynamic is similar, but the index is different. Check which one each lender uses before comparing offers.
What It Costs a Small Business
The Small Business Administration’s 7(a) program, its most common loan, caps interest rates as a spread over the prime rate. The maximum margin a lender can charge depends on the loan amount:7U.S. Small Business Administration. 7(a) Loan Program Terms, Conditions, and Eligibility
- $50,000 or less: prime plus 6.5%
- $50,001 to $250,000: prime plus 6.0%
- $250,001 to $350,000: prime plus 4.5%
- Over $350,000: prime plus 3.0%
At a 6.75% prime rate, a $50,000 loan could carry a rate as high as 13.25%, while a $500,000 loan tops out at 9.75%. These are ceilings, not fixed prices. Borrowers with strong financials can negotiate lower margins, but the prime rate still sets the floor, so every FOMC cut reduces the cost of SBA financing even if your margin doesn’t change.
Tax Treatment of Prime-Linked Interest
HELOC Interest
Interest on a HELOC is deductible only if you used the borrowed funds to buy, build, or substantially improve the home securing the loan. Tap the line for debt consolidation, a vacation, or tuition, and none of that interest qualifies, regardless of what your Form 1098 reports.8Internal Revenue Service. Publication 936 – Home Mortgage Interest Deduction The 1098 doesn’t distinguish between deductible and non-deductible interest, so you have to track the use of proceeds yourself.
Business Interest Expense
Businesses paying interest on prime-linked commercial loans face limits under Section 163(j). Deductible business interest in a given year cannot exceed the sum of business interest income, 30% of adjusted taxable income, and any floor plan financing interest.9Internal Revenue Service. Questions and Answers About the Limitation on the Deduction for Business Interest Expense Small businesses that meet a gross receipts test (averaging $31 million or less over the prior three years, as of the most recent published threshold) are exempt entirely. Any business interest above the limit carries forward to future years, but planning matters, because a high prime rate environment means bigger interest bills that are more likely to run into the cap.
Where 6.75% Sits Historically
Today’s prime rate is moderate by historical standards. The all-time high was 21.50%, reached in December 1980 when the Federal Reserve under Paul Volcker was fighting double-digit inflation. The all-time low was 1.75% in December 1947, during the post-war period of controlled rates. More recently, the prime rate held at 3.25% from March 2020 through early 2022, when the Fed kept rates near zero in response to the pandemic.
A 6.75% prime rate isn’t historically high, but it’s well above the near-zero levels a generation of borrowers grew accustomed to between 2009 and 2022. If the March 2026 FOMC projections play out, the rate could drift modestly lower by year-end. Returning to 3.25% would require an economic shock significant enough to push the Fed back to emergency-level policy.