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What Is the Prime Rate – and How It Impacts You

Key Takeaways

  • The prime rate helps financial institutions determine how much interest to charge their most credit-worthy consumers.
  • The prime rate increased to 5.00% in June 2018.
  • A change in the prime rate can affect the following areas: credit cards, home equity, student loans, and savings accounts.

On June 14, 2018, the prime rate increased to 5.00%, up from 4.75%. So what does this mean for you?

Let’s start with an initial question: What is the prime rate? It’s a benchmark set and used by financial institutions to determine how much interest to charge their most credit-worthy consumers. So how often does the prime rate change? And how does the current prime rate impact you?

History of the prime rate

The first prime rate was set back on December 1, 1947, at 1.75%. Since then, the prime rate has gone through many changes, with some years — such as 2001 — experiencing more than 10 changes.

However, the frequency of changes has slowed tremendously this decade; the prime rate stayed at 3.25% from December 2008 until December 2015. The latest increase marks the sixth change in the prime rate since 2008, a year in which there were seven changes alone.

Since its inception, the prime rate has risen as high as 21.5% on December 19, 1980, with the median prime rate at 6.5%.

Impact of prime rate increase

Here is a list of accounts that could be affected by the prime rate increase:

  • Credit cards: Most credit cards have variable interest rates that are tied to the prime rate. With that in mind, the 0.25% increase could translate to an additional $2.50 for every $1,000 of debt you carry. (Note: Some credit card interest rates are set by the London Interbank Offered Rate, or Libor, instead of the prime rate.)
  • Home equity: If your home equity line of credit (HELOC) has an adjustable rate, you could see a change in your monthly payments.
  • Student loans: Do you have a private student loan with a variable rate? If so, there’s the possibility that you will pay more interest by the same 0.25% as the prime rate increase.
  • Savings accounts: Typically, rates on savings accounts are slow to change from one prime rate change to the next, but they could be affected after multiple changes or one larger alteration.

While some financial institutions will raise rates on these types of accounts, others will keep their interest rates as-is, so check in with your accounts to see how they will be impacted.

More information

We are committed to helping you reach your potential by providing personalized solutions. Our dedicated colleagues can help you find the right product to help you reach your goals. To learn more, please call 1-877-360-2472, visit us online, or visit your nearest Citizens Bank branch.

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