What is the Prime Rate Today and How Does it Affect You?

The prime rate has drastically changed over the past months and this has significant effects on consumers. Learn about the prime rate today and why it matters to you.

What is Prime Rate?

To put simply, the prime rate is the interest rate that most financial institutions and banks charge their best customers. So, if you have excellent credit and the lender finds you to be a low-risk borrower, you may be entitled to the lowest interest rate the lender can offer. But regardless if you belong to the most creditworthy customers or not, you are still affected by the changes in the prime rate.

The prime rate is determined according to Federal Funds Rate, the interest rate that banks and other financial institutions charge each other. These institutions are required to have reserved money for their customers to withdraw. If a certain bank has an insufficient reserved fund at the end of the day, it has to borrow from another bank. This is where the federal funds rate comes in.

Now, the prime rate is usually more or less 3% higher than the federal funds rate. For instance, if the federal funds rate is 2.5% plus 3%. Then the prime rate is 5.5%.

What is the Prime Rate Today 2022?

Since the beginning of 2022, the prime rate changes four times already as of August 2022 and it’s increasing. The first increase happened last March 17, 2022, when it raised from 3.25% to 3.50%. This is the first prime rate change in 2 years. The last adjustment was on March 17, 2020.

The second increase this year was last May 5, 2022, in which it raised to 4%. Then another inflation happened again the following month, June 16, 2022, in which the prime rate increased from 4% to 4.75%. Another 0.75% was added again last July 28, 2022, which made it to 5.50%. The prime rate today remains 5.50%. We are still in the third quarter of the year and changes could happen anytime.

Here are Prime Rate Changes Over Time

How Does the Prime Rate Today Affect You? 

It was mentioned at the beginning of this article that the prime rate is the interest rate charged by banks to their most creditworthy customers. However, this does not mean that only low-risk borrowers or those with excellent credit scores are affected by it. In fact, it affects everybody.

First, the interest rates of most loans are based on prime rates. This includes credit card debts, mortgages, and car loans, to name a few. The prime rate serves as a benchmark of how much percentage will the creditors charge on loans. Influenced of course by the customer’s credit status, income, savings, and payment terms.

So, if you have a credit card, planning to take out a loan, or have an existing loan, the prime rate today is very relevant to you. Especially if you have a debt with variable interest rates. This means that the interest rates of your loan can change over the years depending on the prime rate of that time. If the prime rate increases, the creditor may also decide to increase the interest rate of your loan. If the prime rate decreases, then you may also enjoy good adjustments on your interest rate.

For variable interest rates, like credit cards, you can have an idea of how much interest rate to expect by reading through your agreement. You may find something like “8% plus the prime rate” on the APR. This means that if the prime rate today is 5.50%, your annual interest rate would be 13.50%.

There is no hard-and-fast rule on how banks and lenders decide on their interest rates. Some may charge higher or lower than their competitors. So, it is a good practice to find banks or creditors that offers lower interest rates than the others.

Aside from loans and interest rates, prime rates can also greatly affect the economy. When the prime rate is low, it makes funds easily available for businesses. This is because loans are less expensive. This encourages and allows companies to expand. As a result, the economy grows. On the other hand, if the prime rate is high, the economy is down.

With the infiltration we are experiencing today, would it be better to get the lowest interest rate when taking out a loan? For instance, being charged with the prime rate of your bank.

How to achieve the prime rate on loans?

As mentioned, the prime rate is given to the best customers. People with excellent credit scores and low risk. Taking care of your credit, paying your debts on time, and monitoring your credit records to correct any derogatory items as soon as possible can help you become creditworthy for prime rate. If you have bad credit, it is best to start fixing your credit as soon as possible.

Conclusion:

The prime rate plays a vital role in determining the interest rates set by financial institutions. It affects everyone as it is the benchmark of interest rates on loans. The prime rate today is the highest since 2018. This means higher interest rates for loans. The trick is to improve your credit score to get the lowest interest rate possible. You may be far from being the most creditworthy person in your bank now but every little fix in your credit score can lower the interest rate charged to you. Therefore, it’s crucial to start repairing your credit as soon as you can.

About the Author:

This article is written by Lorenzo Rodriguez, the president and senior developer of LMR International Inc., the company who developed the first and the only 100% automated credit repair software in the industry, Credit Money Machine.