What’s prime rate and how does it affect me?

Woman with glasses reviewing finances with calculator at the kitchen table.
OCCU  -  11.17.2022

Have you noticed a change in your loan or credit card payment recently? You’re not the only one.

Borrowers across the United States are seeing a difference in their monthly payments, and it’s all because of recent changes in the prime rate. Since March, the prime rate has been steadily climbing, reaching 7.00% in the month of November. The impact of this change has trickled down to affect minimum payments on individual consumer loans.

So, what exactly is the prime rate, and why does it matter to you? Here’s everything you need to know.

What is the prime rate?

The prime rate refers to the interest rate most banks use for consumer loan products. It’s basically the best possible interest rate you can receive. Only borrowers with the very best credit score qualify for the prime rate.

Unlike the federal interest rate, which is determined by the Federal Reserve (Fed), the prime rate is set by banks and lending institutions themselves. However, they use the Fed’s rate to calculate the prime rate, typically adding three percentage points. Since the current federal rate is 4.00%, the prime rate is 7.00%

Why did the prime rate go up?

A couple years ago, interest rates dropped to their lowest point since 2008 to stimulate the economy post-pandemic. As the economy started heating up again, however, rising inflation became a problem. Over the past several months, the Fed has responded by increasing interest rates to help curb inflation. This in turn causes the banks’ prime rate to climb.

What does this mean for me?

When the prime rate goes up, it has a trickle-down effect on all other interest rates. Since the minimum payment on your loan or credit card is based on your interest rate, it will typically fluctuate with changes in the prime rate.

If you have a fixed-rate personal loan or mortgage — which means you locked in your interest rate when you took out your loan — your minimum payment won’t change. But if your loan has a variable rate, such as a credit card or some personal loans, you’re probably looking at a higher monthly payment.

What can I do?

If you find yourself juggling a change in your minimum loan or credit card payment, it may be time to make some adjustments to your money plan. But you don’t have to do it alone. OCCU is here to support you. Our team can help you navigate the changes to the prime rate and weigh your options, such as:

  • Adjusting your monthly budget to accommodate higher monthly payments.
  • Transferring high-interest credit card debt to a lower-interest loan.
  • Taking advantage of high-yield savings account to help offset the increase.
  • Re-evaluating your long-term money goals to ensure you stay on track.

Whether it’s small or large adjustments to your money plans — the OCCU team is here to help support you each step of the way. Please don’t hesitate to contact us when you’re ready and need of some guidance.

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