The Wall Street Journal Prime Rate is an average of the prime rates that 10 of the largest banks in the United States charge their highest credit quality customers, often for short-term loans. It is calculated by a market survey and published by the Wall Street Journal (WSJ).
Breaking Down Wall Street Journal Prime Rate
The WSJ prime rate is one of the market’s leading sources for comprehensive average prime rate reporting. The WSJ prime rate gets its name from the Wall Street Journal’s practice of polling the 10 largest U.S. banks to see what their prime lending rate is. When seven or more of the 10 banks polled change their prime rate, the Wall Street Journal publishes a new prime rate. The current rate can be found here.
The WSJ prime rate has historically fluctuated substantially over time. In December 2008 it reached a low of 3.25% after being reported at 9.5% in the early 2000s. In December 1980, it reached a record high of 21.50%. Generally, the rate is dictated by changes from the Federal Reserve’s Federal Open Market Committee, which meets every six weeks and reports on the level of the federal funds rate.
Prime Rate Products
The WSJ prime rate provides a gauge for the prime rate at banks across the industry. The WSJ prime rate has historically been approximately 3% higher than the federal funds rate. Thus the rate is heavily influenced by the Federal Reserve’s monetary policies.
Generally, a bank’s prime rate is the lowest rate it charges on lending to its highest credit quality customers and also to other banks. Banks can lend all types of products to borrowers at their prime rate. They also use the prime rate as an indexed rate for variable credit products.
Products utilizing a prime rate can include mortgages, home equity lines of credit and loans, and car loans. Typically a prime rate is most broadly used in variable credit products with the prime rate serving as the indexed rate.
Indexed Rate Lending Products
Indexed rate products often use the prime rate as the base rate of interest with a margin or spread determined by the borrower’s credit profile. The prime rate is commonly utilized in variable rate products as an indexed rate since it is widely recognized and followed across the industry. Other comparable indexed rates can include LIBOR and U.S. Treasuries.
If a borrower has a variable rate loan or credit card, the terms of the variable rate changes will be disclosed in their credit agreement. Lenders typically base their rate spreads for variable rate products on a borrower’s credit profile. Therefore higher-quality borrowers can receive a lower margin while lower credit quality borrowers will receive a higher margin. In a variable rate credit product, the margin remains the same over the life of the loan; however, the variable rate is adjusted when there is a change in the underlying indexed rate.
Borrowers with variable rate products will typically want to follow the prime rate and specifically the WSJ prime rate since it is published publicly. When a majority of the banks surveyed by the WSJ increase their prime rate, then it is a good indication that variable rates are rising.
For one example of a prime rate’s influence, consider a Bank of America credit card borrower with a credit card balance that is subject to a variable annual percentage rate. The borrower’s margin is 15.99% plus the indexed rate, which is based on the bank’s prime rate. For the borrower, this means that if the prime rate is 3.25%, their interest rate will be 19.24%. If the bank’s prime rate increases to 4.25%, their interest rate would increase to 20.24%. (For related reading, see "Who Actually Owns the Wall Street Journal?")