What Is The Wall Street Journal Prime Rate?
Let me explain what the Wall Street Journal Prime Rate is—it's an aggregate average of the various prime rates that 10 of the largest banks in the United States charge to their highest credit quality customers for loans with relatively short-term maturities. This combined rate comes from a market survey and gets published regularly by The Wall Street Journal (WSJ).
Key Takeaways
- The Wall Street Journal Prime Rate is an average of 10 large American banks' prime rates, which is published in WSJ on a regular basis.
- The prime rate is the best interest rate charged to a bank's most financially sound customers.
- The WSJ aggregate prime rate gives a better sense of what this best borrowing rate is across America.
Understanding the Wall Street Journal Prime Rate
You should know that the prime rate is the interest rate commercial banks charge to their most creditworthy customers. The federal funds overnight rate forms the basis for the prime rate, and the prime rate itself acts as the starting point for most other interest rates. The WSJ prime rate stands out as one of the market’s leading sources for comprehensive average prime rate reporting.
The WSJ prime rate earns its name from The Wall Street Journal’s method of polling the 10 largest U.S. banks to determine their prime lending rates. When seven or more of those 10 banks change their prime rate, The Wall Street Journal publishes the new rate. You can find the current rate on the WSJ's Market Page.
Historically, the WSJ prime rate has seen substantial fluctuations. In December 2008, it hit a low of 3.25% after being at 9.5% in the early 2000s. It reached a record high of 21.50% in December 1980. As of August 2021, it's back down to 3.25%. Generally, changes in this rate are driven by the Federal Reserve’s Federal Open Market Committee, which meets every six weeks and reports on the federal funds rate level.
The WSJ prime rate offers a gauge for prime rates across the banking industry. It has historically been about 3% higher than the federal funds rate, so it's strongly influenced by the Federal Reserve’s monetary policies.
Lending Products That Utilize the Prime Rate
In general, a bank’s prime rate is the lowest rate it offers on lending to its highest credit quality customers, including other banks. Banks can apply this prime rate to all types of lending products for borrowers. They also use it as an indexed rate for variable credit products.
Products that utilize a prime rate include mortgages, home equity lines of credit and loans, and car loans. Typically, the prime rate is most commonly used in variable credit products, where it serves as the indexed rate.
For indexed rate products, the prime rate acts as the base interest rate, with a margin or spread added based on the borrower’s credit profile. The prime rate is popular for variable rate products because it's widely recognized and followed industry-wide. Other similar indexed rates include LIBOR and U.S. Treasury rates.
If you have a variable rate loan or credit card, the terms for rate changes will be outlined in your credit agreement. Lenders set their rate spreads for variable products based on your credit profile—higher credit scores mean lower margins, and lower scores mean higher ones. In these products, the margin stays constant over the loan's life, but the variable rate adjusts with changes in the underlying indexed rate.
As a borrower with variable rate products, you'll want to track the prime rate, especially the WSJ prime rate, since it's publicly published. When a majority of the banks surveyed by WSJ raise their prime rates, it's a clear sign that variable rates are increasing overall.
Take, for example, a Bank of America credit card borrower with a balance subject to a variable annual percentage rate. Their margin is 15.99% plus the indexed rate based on the bank’s prime rate. If the prime rate is 3.25%, their interest rate becomes 19.24%. If the bank’s prime rate rises to 4.25%, their rate increases to 20.24%.
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