Definition
The benchmark rate banks charge their most creditworthy business customers, which moves in lockstep with the Federal Reserve's policy rate. Many consumer rates, especially credit cards and HELOCs, are set as prime plus a margin.
Why it matters
When the Fed moves, prime moves the same day, and every variable-rate balance reprices with it. Knowing a debt is priced at prime plus a margin explains why its rate changes without any notice from the lender.
Example
A HELOC priced at prime plus 1% carries an 8.5% rate while prime sits at 7.5%. If the Fed raises rates by half a point, prime follows and the HELOC becomes 9%, adding about $250 a year of interest per $50,000 drawn.
Put it into practice
Related terms
This definition is educational, not financial, legal, or tax advice. U.S. rules and limits change; verify time-sensitive details with official sources. See our disclaimer.