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Added July 7, 2010 from: Mike Killian
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 Mike Killian
Answered By Mike Killian:
The prime interest rate is the interest rate charged by banks to their most creditworthy customers. Generally, it is described as some amount of interest plus prime, or prime plus something on variable rate products. For example, if the current prime rate is 3.25%, the rate might show as 8% plus the prime rate, which would equal 11.25%. If that's the interest rate on a debt and the prime changes up or down, the ultimate result will change. The prime rate is usually adjusted at the same time and in correlation to the adjustments of the Fed Funds Rate.

The alternative is a fixed rate of some selected amount. Changes in prime rate rarely affect a fixed rate unless there is some contingency for such a change within your contract.

As a point of interest, some banks use the terms "reference rate" or "base lending rate" to refer to their prime lending rate.

This question is about:  Credit Card Rates / Fees
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