What is the prime rate today?

Just as a chef begins gumbo with a roux, a bank bases the interest rates it charges for various loans on the prime rate. Most banks end up using the U.S. Prime Rate published in the Wall Street Journal, which is currently 8.50%. 

What is the prime rate?

The prime rate is the basis point from which banks determine how much interest to charge customers for certain types of loans, such as credit cards.

For instance, Chase sets the annual percentage rate (APR) on purchases for the Chase Sapphire Preferred by adding 12.99 to 19.99 percentage points to the prime rate (as of October 16, 2023).

Every financial institution determines its own rates, but many use the U.S. Prime Rate published every day by the Wall Street Journal, which aggregates rates from the nation’s biggest financial institutions. 

The general rule of thumb, though, is that the prime rate is typically three percentage points higher than the current federal funds rate, which is the interest rate banks charge each other for overnight loans and is directed by the Federal Reserve. The federal funds rate currently ranges from 5.25% to 5.50%, which means a bank’s prime rate would be: 

5.50% + 3.00% = 8.50%

How does the prime rate impact borrowers?

Take the Chase Sapphire Preferred rate mentioned above. When the prime rate rises, borrowers pay more. When it falls, you pay less. 

You can see this trend playing out across the credit card market. For instance, the average credit card interest rate was just 11.85% a decade ago, per the Federal Reserve, when the prime rate was 3.25%. Now, interest on credit card debt is roughly 10 points higher. 

You’ll notice that credit card interest rates rose higher than the prime rate. That’s due to the specific economics of credit card lending for banks, but demonstrates the importance of maintaining a clean credit history so that you’ll garner the lowest possible rate. 

For higher-risk borrowers, “the interest rate is typically quoted as prime plus some additional interest that reflects the lender’s assessment of the extra risk involved in making the loan,” said John Cunnison, chief investment officer and a chartered financial analyst (CFA) at Baker Boyer, a bank based in Washington state. 

In the Chase Sapphire Preferred example, then, the most creditworthy customers would see a rate that was seven points lower than what the least creditworthy Chase customers would pay.

What loans can be impacted?

Whichever loan is based on the prime rate will be impacted when the prime rate rises or falls. Typically that includes credit cards, personal loans, small business loans and various types of home loan products – like a home equity line of credit (HELOC) and adjustable-rate mortgages (ARMs).

Whether or not the rate on your specific debt will rise or fall depends on the nature of your obligation. 

For example, if your ARM adjusts its interest rate every five years and the next adjustment occurs after a precipitous increase in the prime rate, your mortgage rate will likely also increase. 

If you already have a fixed-rate installment loan, such as an auto loan, that rate won’t be affected. But if you go into the market to buy a second car, your new interest rate will likely be higher since rates have risen so much in recent years.

Read the terms and conditions on your loan to understand what the interest rate is based on and if it will adjust throughout the course of the loan. 

The prime rate over time

For much of the past 15 years, the prime rate has been muted. It rested at 3.25% from the end of 2008 until 2015 as the Fed set interest rates at near zero following the Great Recession. 

Over the next four years or so it ticked up as the economy recovered and the Fed was eager to return interest rates back to more historically appropriate levels. 

However, the Fed began cutting rates in the latter part of 2019 following the American trade issues with China, before knocking them to almost zero again as economies shut down to stop the spread of the novel coronavirus.

In early 2022, however, the prime rate started an upward march as the Federal Reserve began hiking rates to thwart inflation caused by too much stimulus spending in response to the pandemic-era economic shutdowns. The Fed has since increased rates by more than five percentage points, and the prime rate has followed suit. 

The last time the prime rate reached 8.50% was in the early months of 2001. 

Still, the prime rate has been much higher in the not-too-distant past, reaching 21.50% in 1980, putting the recent pain of high inflation and interest rates into some perspective.