Having a stellar credit rating may not be everything, but it sure does have its perks. One of which is being offered a prime rate for different financial products you take advantage of from the bank and other lending institutions. Since individuals with better credit rates are generally considered low-risk clients, they are rewarded with the best interest schemes for doing business with the concerned lending institution.
These rates also determine the costs that came with borrowing money through home mortgages, car loans, and credit cards. Remember, however, that economic and macroeconomic shifts highly influence these rates. As such, they can heavily fluctuate.
HOW IS THE PRIME RATE DETERMINED?
Contrary to popular notions, it’s not the Federal Reserves determining and setting the prevailing prime rate. Instead, this is set by the country’s biggest banking and financial lending institutions. Besides that, this rate is also impacted by external factors as the federal fund rate — an interest rate that the Fed determines.
This rate hovers around 3% beyond the 0 to 0.25% federal fund rate. As of July last year, the prime rate is set at 3.25% — the lowest since 2008. Once the Fed votes to increase the interest rates, it’s also expected that the prime rate will likewise increase. On the other hand, the prime rate is adjustable anytime, and it only shifts if a major index or benchmark is adjusted.
WHAT CAUSES THE PRIME RATE TO CHANGE?
Turbulent times like the economic recession and the global health crisis can cause the rate to fluctuate. At the height of the pandemic, you can see the prime rate hitting its lowest in years. Though they can change any time, it’s pretty usual for years to go on without us seeing a major shift.
HOW DOES THIS RATE AFFECT DEBTORS?
The interest rates on a vast majority of financial products depend on the prime rate. Generally, your given interest rate is beyond the prime rate, but the amount you receive could be greater depending on your lender. When this rate changes, the annual percentage rate (APR) on your credit card will also fluctuate.
Simply put, if the prime rate decreases, your credit card APR also decreases. The application of these changes could happen after one or two credit card billing cycles. The rates on financial products like auto loans and personal loans are not affected since the interest rate for these was fixed when you applied for the loan.
Being financially literate gives you a bigger elbow room in planning your present and future expenses. Information like this can give you a better reason why you should be working on improving your credit score. We hope that you’re also benefitting from the advantages of a prime rate.
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