How prime interest rate may affect your monthly bills
If you know nothing about prime interest rate (also referred to as the U.S. prime rate or The Wall Street Journal rate), think of it as the foundation that banks use to set interest rates on various short-term loans, including credit cards. It is usually seen as the minimum interest rate a bank will charge you plus the risk in taking you on as a customer. While the prime interest rate isn’t a mandatory base number, it is the standard for most banks. You can learn more about the fluctuation of the prime interest rate on Bankrate.com.
Smooth skies for variable interest rates … for now
Right now, you may be paying reasonably low payments toward your credit card balance, car loan or home loan, but this may be short-lived if you have an adjustable or variable interest rate. While variable interest rates can be beneficial, especially right now, they could cause a significant change in that hefty credit card bill you haven’t paid off lately.
A risky situation for variable interest rates
If you apply for a credit card, a bank may look at your credit report and determine that you are a risky customer, charging you the prime interest rate (3.25 percent as of March 2010) plus an additional 12 percent due to your low credit score. Your interest would be 15.25 percent per month. If you had a balance of $5,000, with a variable interest rate of 15.25 percent (3.25 percent + 12 percent), you would be paying about $750 in interest per month. But what if the prime interest rate goes up over the course of carrying that balance?
If the prime interest rate increased from the current 3.25 percent to 8 percent, your APR could jump to 20 percent (8 percent + 12 percent), increasing your interest to $1,000 per month.
Standard interest rate may be more beneficial
The important thing to note is whether your interest rate is variable or non-variable, often called “fixed.” Contact your bank and ask about putting a cap on any variable interest rates currently in place, if a cap isn’t already in place. You could also consider switching to a fixed rate. There are very few fixed-rate cards. Fixed rates are generally higher; however, you could manage your budget better and avoid the risk of an increase in your interest rates. Knowing what you owe each month can reduce stress and keep your financial home in order, too.
Keep up with the current prime rate
Currently, the prime interest rate is astonishingly low at 3.25 percent, which is great for many people. However, it reached as high as 21.5 percent in 1980 and 1981. Will the prime interest rate increase anytime soon? Only time will tell. You can keep up with the current prime rate here at Bankrate.com.