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The federal funds rate and the prime rate

How the federal funds rate affects finance
The prime rate and the federal funds rate

Interest rates on variable-rate credit cards and home equity lines of credit are based on the prime rate, a consensus rate from the 10 largest U.S. banks. Commercial banks use it to make loans to their most creditworthy customers.

The prime rate, which is tied to the federal funds rate, is published by The Wall Street Journal and changes when seven of the 10 banks change their rates.

Lenders will add a margin to the prime rate, such as 2 percentage points, to determine the interest rate a consumer will pay on credit cards or HELOCs, says Keith Leggett, senior economist at the American Bankers Association in Washington, D.C.

However, a consumer's credit score and history also help determine an interest rate. A consumer with a higher credit score and a better payment history likely will receive a lower interest rate, while someone with a lower score and blotchy payment past will get a higher rate.



Editorial Disclaimer: The editorial content is not provided or commissioned by the credit card issuers. Opinions expressed here are author’s alone, not those of the credit card issuers, and have not been reviewed, approved or otherwise endorsed by the credit card issuers.

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