Banks use a reference point called the U.S. Prime Rate to set interest rates on various loans, including credit cards. By industry standard, the Prime Rate is set exactly 3.00% higher than the Federal Funds Target Rate.
The Chain Reaction
- The Fed: The Federal Open Market Committee (FOMC) changes the Federal Funds Rate.
- The Prime Rate: Within hours of the Fed’s announcement, major banks increase the Prime Rate by the same amount.
- Your APR: Your credit card’s APR is calculated as
Prime Rate + Your Margin.
Interest Cost Comparison (per $1,000 balance)
| Scenario | Monthly | Annual |
|---|---|---|
| At Previous Rate (7% Prime) | $18.33 | $220.00 |
| At Current Rate (6.75% Prime) | $18.12 | $217.50 |
| Total Change | $-0.21 | $-2.50 |
Is it always +3.00%?
For the last several decades, yes. While banks are technically free to set their own Prime Rate, they almost universally stick to the Fed Rate + 3.00% formula to remain competitive and predictable in the financial markets.