Personal Finance

How the prime rate is set

Credit cards point to the prime rate published in The Wall Street Journal as the source of changes in the variable rate they charge on your balance.

So how does the newspaper come up with the rate?

The Journal checks the 10 largest U.S. banks by assets, a Dow Jones spokeswoman said in an emailed reply to questions. If at least seven of them change their prime rate, the prime published in the newspaper's Money & Markets section changes as well.

The prime could update at any time, but in practice, banks only change their prime after the U.S. central bank changes its target federal funds rate. The federal funds rate is what banks charge each other for overnight loans to meet reserve requirements.

Banks traditionally set their prime rate 3 percentage points above the top end of the federal funds rate target range. Credit card agreements add a margin on top of the prime rate to determine your APR.

The Journal's prime rate had not budged from 3.25 percent since Dec. 16, 2008, Dow Jones spokeswoman Colleen Schwartz said. As of Dec. 17, 2015, it rose to 3.50, following the Federal Reserve's quarter-point increase in the federal funds target. As a result, APRs on most credit cards are rising by a quarter point.

See related:What an interest-rate increase will cost cardholdersHow quickly your cards' rates will rise

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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