If you hear the phrase “Prime Rate” being bantered about on the news and are unclear how exactly it relates to you, you are not alone. Let us simplify how it affects the average American and give you insight into what it may mean to you and your finances.
Still unclear how the Prime Rate works? Let us simplify how it affects the average American and give you answers to the two most common Prime Rate change questions. Click here to learn more.
What is affected when the Fed changes the Prime Rate?
Most variable-rate loans are tied to the Prime Rate – which is determined monthly by the Federal Reserve – so it can make borrowing more expensive or more attractive. In the fine print of lending documents, you’ll oftentimes see a statement that reads along these lines: your rate (or “Annual Percentage Rate,” APR for short) is determined by the Prime Rate, plus or minus a specified percentage point. So, when you hear that the Fed changed the Prime Rate, it should sound alarm bells that any variable-rate loans you have may change. Loans, such as home equity lines-of-credit and variable rate mortgages are affected, but credit card rates are typically what hits the consumer’s wallet the hardest. On the other hand, it may provide opportunity to grow your savings.
Read on to learn more.
Credit Card Rates
Credit cards are nearly always tied to the Prime Rate and the interest rate the issuer is charging you changes based on it. When the rate is high, you may be paying a noticeable difference in monthly interest vs. a lower Prime Rate environment. It’s important not to lose sight of your credit card interest rates as they can have a hugely positive or negative effect on your daily finances.
As of 10.7.25, the average credit card APR (annual percentage rate) is 25.34% according to Forbes. However, some issuers, like KEMBA Financial Credit Union, for example, have significantly lower rates, which can save you several hundred dollars a year in interest. Keep a watchful eye on your credit card APR(s) and find a card that makes it easier for you to get out of debt instead of racking up interest charges.
Here is a real-life example:
Assume you carry a $5000 balance on a credit card. Now assume your rate is around the national average of 25.34%. In this scenario, you pay nearly $1300 interest annually. Whereas assuming the same balance on a credit card with an APR of 11.99%, for example, the annual interest is just under $600, saving you more than $650 annually. As you see, the difference in interest rate can cost you every day, and even more when the Prime Rate is on the higher side.
Mortgage Rates and Housing Inventory
Prime Rate can have a major effect on the housing market. For example, with the low rates in 2020 the total cost of a $250,000 home in Ohio would have been about $363,000, including interest, for a 30-year fixed rate mortgage. Compared to a total expense of $567,000 in 2025, the cost of the same house has jumped 56% based on interest rate alone while the base price of the home remained the same.
Please note, this was based on a $50,000 down payment and a loan amount of $200,000, taxes, insurance, and PMI were not included in the savings calculation. So, generally, as the Prime Rate decreases and people realize the interest savings to be had, the housing market booms, and inventory becomes more limited.
Home Equity Loan Rates
There are two types of home equity loans: both a fixed-rate option, locking in your rate for a specific amount over a period of time, and a line-of-credit, which is drawn upon as needed. A Prime Rate change will not affect the interest rate on your fixed-rate loan. However, if you took a fixed-rate home equity loan out during a higher-rate period, you may consider refinancing it to help save on your interest payment. On the other hand, a home equity line-of-credit interest rate typically varies based on the Prime Rate. If you have one, make sure to stay aware of the interest rate you’re paying so you aren’t surprised by your payment changing.
Car Loan Rates
Car loans are typically fixed-rate products, so no, a Prime Rate change would not likely impact your existing car loan. However, if you’re shopping for a new car, it may be advantageous to wait for a Prime Rate reduction as it will impact your cost of borrowing. If you locked yourself into a higher-rate car loan when Prime Rate was higher, it may be beneficial for you to check with your credit union or bank to see if you can refinance your car to a lower rate to save money or pay it off faster.
Savings Product Rates
Although it’s not directly tied to it, the interest rate you earn on your savings products at credit unions and banks – such as standard savings accounts, Certificates (CDs), or Money Markets – can fluctuate with Prime Rate changes. The higher the Prime Rate, the higher savings rates are, on average. Consumers can listen for cues from government officials and projections on Prime Rate changes to help determine what savings products to take advantage of and when. For example, it may benefit consumers to lock in a fixed-rate Certificate (CD) for a longer term if it’s being reported that the Fed is likely to reduce Prime Rate, this will help ensure that you earn a higher rate on your money for the selected time period before rates go down. Money Markets, on the other hand, are generally variable-rate products versus being locked into a fixed interest rate for a period of time. This means that you’ll want to pay close attention to your Money Market rate when Prime Changes as it is likely to be affected positively or negatively. If reduced, it may be advantageous to shop around for better rates.
Where do I go from here?
Our goal is to make you an informed consumer and break down the complexities of Prime Rate changes into something that individuals can understand and point out how it can directly impact Americans, positively and negatively. If you have questions about current interest rates you’re paying on loans, or savings options that may pay you more, check in with your preferred banking institution, like KEMBA. We’d be happy to help you evaluate and make the most of your money.