Prime Rate: What It Is, How It Works and How It Affects You

Learn about how prime interest rates affect you


Whether you’re watching the news online or reading the back of your credit card statement, you might come across the term “prime rate.” Have questions about what the prime rate is and how it affects you as a consumer? Here’s what you need to know about these rates.

Key Takeaways:

  • The prime rate is the interest rate that most commercial banks use to set the APR on credit cards.
  • The prime rate fluctuates when the Federal Reserve changes the federal funds rate.
  • It’s likely that your credit card’s APR will be higher than the prime rate, and it may fluctuate as the prime rate changes.
  • Changes to the prime rate may impact things like your minimum payment and interest rate.

Looking for a Low-Interest Card?

Check out cards with a low intro APR and see which is right for you.

Explore Cards

What Is the Prime Rate?

The prime rate is an interest rate that most commercial banks use to set the annual percentage rate (APR) on credit cards, which determines how much interest you’ll pay on purchases and other transactions made with your credit card. The prime rate is typically based on the current federal funds rate.

How Is the Prime Rate Set?

The prime rate is typically influenced by the federal funds rate, which is the overnight rate that banks use to lend money to each other. Depending on the Federal Reserve’s view of the U.S. economy, the Federal Reserve may adjust the federal fund rates, which will likely impact the prime rate. 

The federal fund rate is normally used as the benchmark, or base rate, for prime rates. So when the Fed tweaks the rate, it causes the rate percentage to change. However, those shifts are usually small.

What Is the Current Prime Rate Today?

The current prime rate typically fluctuates between 3% and 6%. To stay up to date with the current prime rate, visit The Wall Street Journal.

Prime Rate History

Here’s how the prime rate has changed over the past few years, according to the Federal Reserve of St. Louis.

Date in Effect Rate
May 5, 2022 4.0%
March 17, 2022 3.5%
March 16, 2020 3.25%
March 4, 2020 4.25%
Oct. 31, 2019 4.75%
Sept. 19, 2019 5%
Aug. 1, 2019 5.25%
Dec. 20, 2018 5.5%
Sept. 27, 2018 5.25%
June 14, 2018 5%
March 22, 2018 4.75%
Dec. 14, 2017 4.5%
June 15, 2017 4.25%
March 16, 2017 4%

 

What’s the Difference Between APR and Prime Rate?

The prime rate is the interest rate that most commercial banks use to set the APR on credit cards. 

When it comes to the interest rate or APR you are getting from your credit card, it’s important to remember that your APR will likely be higher than the prime rate. This means that if your credit card has a variable APR based on the prime rate, when the prime rate goes up, your APR may go up. If prime drops, your APR could follow.

How to Find Your APR

Your current APR can be found on your monthly credit card statement. If you’re a Capital One customer, you can find your current APR—and determine whether it’s based on the prime rate—by looking at the “Interest Charge Calculation” section of your mailed or online statement.

How Is a Variable APR Calculated?

If you have a variable APR, it’s simply an index rate—usually the prime rate—plus a number, which is called a margin. 

Understanding Prime Rate Changes

If you’re wondering whether prime rate changes impact your credit account, the first step is to check your monthly statement. There, you can see if your APR is based on the prime rate. For Capital One customers, your online statement or the back of your printed statement will also show you when any changes to the prime rate may affect your account.

Does a Prime Rate Change Affect Minimum Payments?

Yes, it can. Your minimum payment includes interest charges, which are based on your APR. If your APR is affected by a change to the prime rate, your minimum payment may also change.

Prime Rates & Monthly Interest

Most changes to the prime rate will have a pretty small impact on your monthly interest charges. For instance, if you have a balance of $500 and your APR goes up .25%, your monthly increase in interest charges would be only 10 cents. Even if you carry an average daily balance of $10,000, that same rate change would mean your monthly interest charges would increase by about $2.

Reducing Interest Payments—Regardless of Rates

All this talk of prime rates and APRs might leave you wondering: How can I reduce the amount of interest I pay? Start by trying to pay more than your minimum payment by the due date each month. But the best way to avoid interest payments on purchases? Pay your entire balance on time, every month.

Whether you’re shopping for a new credit card or looking for ways to lower your interest on an existing card, understanding rates and how changes can impact you is a great start. At the end of the day, it can help you be a smarter consumer with better control of your credit.


We hope you found this helpful. Our content is not intended to provide legal, investment or financial advice or to indicate that a particular Capital One product or service is available or right for you. For specific advice about your unique circumstances, consider talking with a qualified professional.

Related Content