What Is the Prime Rate (and How Does It Affect Your Card)?
This guide explains what the prime rate is, how it connects to the Federal Reserve, and why it decides your card APR.
What the prime rate is
The prime rate is a benchmark that banks use as a starting point for pricing consumer loans, including credit cards. It tracks closely with the Federal Reserve target interest rate, sitting a set amount above it, so the prime rate effectively passes the Fed decisions through to everyday borrowing.
How it sets your card rate
Most credit cards carry a variable APR expressed as the prime rate plus a margin, for example prime plus a certain number of percentage points. The margin is fixed to your card and reflects your creditworthiness, while the prime part floats. Add them together and you get your current APR, which is why two people can hold the same card at different rates.
Why your rate moves
When the Federal Reserve raises or lowers rates, the prime rate moves the same amount, and every variable-rate card built on prime adjusts, usually within a billing cycle or two. This is the mechanism behind a card rate changing on its own. The practical takeaway is unchanged: if you pay in full each month you avoid interest entirely, so the prime rate never touches you, as explained in how interest works.
- The prime rate is a benchmark banks use to set lending rates.
- It moves with the Federal Reserve target rate.
- Most card APRs equal the prime rate plus a fixed margin.
- When prime rises or falls, variable card rates follow.
- Your margin depends on your creditworthiness, and it does not change with prime.
Frequently asked questions
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