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By Jane Goldman | Citizens Bank Staff
Unless you’re a banker or really interested in economics, it’s not likely that a discussion about the prime rate will come up at your dinner table or in texts back and forth with your bestie. But, it’s a common term that affects almost all of us in some way, as it has an impact on how much we pay in interest on the money we borrow and the return we get on money in our savings accounts.
Within the Federal Reserve, The Federal Open Market Committee (FOMC) meets every six weeks to discuss and set the federal funds rate; sometimes it changes and sometimes it doesn’t. They look at the economy and other economic indicators to establish what they think will be a beneficial rate for banks to lend each other money. In slower economies, the FOMC tries to keep the federal funds rate low to encourage borrowing, which leads to spending and investing, but when the economy grows quickly, the FOMC might raise the rate to offset and balance the economy.
The prime rate, in turn, is based on the federal funds rate. Also known as The Wall Street Journal prime rate or the U.S. Prime Rate, it’s a benchmark set and used by financial institutions to determine how much interest to charge a bank’s customers on loans. Typically, it’s about 3% higher than the federal funds rate.
While the prime rate is likely the best rate available, it’s not a mandatory minimum for lenders to use. And just because the feds change the federal funds rate, financial institutions are not required to change their prime rate (although they often do).
The prime rate is then used as a reference point, known as an index, by financial institutions and set interest rates based on that index often adding a margin based on the borrower’s credit history and other financial details and what kind of risk that poses for the lender.
Here’s a list of accounts that could be directly affected by changes to the prime rate:
Any loan or line with a fixed rate, rates set by the bank, or rates tied to LIBOR won’t change. Some examples include:
While some financial institutions will change their rates when the prime rate changes, others will keep their interest rates as is, so check in with your accounts to see how they’ll be impacted.
Whether you have questions about an existing account or are interested in a new product, our dedicated colleagues can help answer your questions and find the right solution for you. To learn more, please call 1-877-360-2472, visit us online, or visit your nearest Citizens Bank branch.
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