- 1). Review how the prime rate is set. The Wall Street Journal will survey the top-10 banks in the United States to see where they have set their prime rate. When seven of these 10 banks have the same prime rate, the Wall Street Journal will publish this rate in its business publication. All other banks will adjust their rate to match what is published in the Wall Street Journal.
- 2). Calculate the actual rate. Once the prime rate is determined, banks will charge depending on the level of risk a customer represents. A bank may charge a customer the prime rate plus 2 percent. For example, if the prime rate is 3.25 percent, the bank will charge the customer 5.25 percent for certain loan products. The more risk a customer presents, the higher the rate they pay over and above the prime rate. The prime rate is used to determine the rate on credit cards, student loans, home equity lines of credit, and car loans, according to the Wall Street Journal Prime Rate. The prime rate will affect products that have variable rates, such as adjustable rate mortgages and variable rate credit cards.
- 3). Look at the Federal Funds Rate. Banks will borrow money from each other overnight. The interest rate they charge each other is the Federal Funds Rate. This rate is tied to the prime rate; when the Federal Funds Rate increases the prime rate increases. The Federal Reserve will move the Federal Funds rate up or down depending on what they are trying to accomplish with the economy.
- 4). Review a customer’s credit score. Mortgage lenders will review a customer’s credit profile to see what his credit score is. Scores range from 300 to 850. Mortgage lenders use credit scores to see what the likelihood that someone will default on a loan is. As of July 2010, a customer with a credit score in the range of 760 to 850 can receive an interest rate of 4.328 percent based on 30-year fixed mortgages in the amount of $300,000. This information is based on a national average, according to My FICO.
SHARE
