Federal Prime Interest Rate

The Federal prime interest rate is used by major banks for their creditworthy customers on various types of loans. The prime rate is based upon the federal funds rate set by a committee that meets several times a year. The Federal Reserve prime rate stays the same unless the majority of the largest banks change their rates or the Fed Reserve board (Fed) changes it when economic conditions warrant a change. This standard is used to calculate percentages on credit cards, home equity lines of credit, auto loans, and other types of loans. The Federal Reserve board has the job of trying to maintain a stable economy and keep the financial system strong to try and avoid inflation. The secret toward success with anything includes acknowledging the Lord in everything. "And all these blessings shall come on thee, and overtake thee, if thou shalt hearken unto the voice of the LORD thy God" (Deuteronomy 28:2).

The prime rate affects short-term loans such as credit cards or home equity lines of credit. Banks that issue credit cards to consumers try to protect their own interest by not offering accounts with lower interest than the Federal prime interest rate. A credit cardholder can find out if the percentage on his or her account will be affected when the standard set through the Federal Reserve Board changes by looking at the cardholder agreement. Most banks or financial institutions add a certain percentage to the standard rate set by the Fed to come up with the percentage of interest set on the cardholder's account.

The standard percentage set by the Fed can have an affect on investments. This can largely be seen in investments with certificates of deposit and with bank savings accounts. A lower standard percentage issued by the Fed usually means that a certificate of deposit will not be worth as much and it can also mean that percentages on a savings account will go down. Many of the banks and financial institutions that offer consumers a way to save will change their interest based upon fluctuations in the Federal prime interest rate. The fluctuations are not normally a large amount and can be in the consumer's favor if the standard percentage goes up as interest earned. When the changes in the percentage increase then investments can increase as well.

When the standard percentage set by the Fed increases then consumer spending will go down. Businesses are less likely to grow due to fewer sales from consumer spending. Increases in the standard percentage can even lead to unemployment and slow economic growth. Some of the considerations or economic indicators of upcoming increases in the standard percentage are housing, employment levels, and growth in the money supply. When the economy is suffering and consumers are not spending this may prompt a lower Federal Reserve prime rate.

A lower standard percentage encourages consumers to spend more. Lower percentages on mortgage loans, car loans, and even credit cards will help to speed up consumer spending and help the economy to grow. A lower standard percentage encourages people to buy a home or refinance the one they have. When there is a large amount financed then even the smallest changes on the interest can make a significant difference. This difference for a homeowner would also mean paying off the mortgage much sooner. New mortgages mean more money for banks and causes growth because it increases building. An increase in building means more jobs and more consumers to put money back into the economy.

Small business loans and consumer loans are often priced according to the Federal prime interest rate. Customers with very high credit scores are good candidates to receive the lowest interest on loans. The standard percentage set by the major banks and the Reserve serves as a starting point for short term loans such as credit cards and auto loans. For customers who are considered a risk, banks and other loan institutions may start with the standard percentage but then add on a substantial amount of interest to more than cover losses. The finance charges associated with credit cards can vary depending upon the payment history of the customer. If a customer is late in making a payment a bank may be able to raise their finance charges considerably.

When the economy seems to be growing too fast the Fed will raise the Federal Reserve prime rate to avoid inflation. Inflation causes the prices of goods and services to increase. When this happens the value of the dollar goes down. Eventually inflation can cause an economy to stall. The value of the dollar can affect foreign investments and the sell of products to other countries. The Fed tries to maintain a balance in the economy where there is slow growth by controlling the standard percentage rate that can be charged on loans.

Inflation is measured by the Gross Domestic Product and the Consumer Pricing Index. The Gross Domestic Product measures goods and services within a year's time. This does not take into consideration financial transactions or used products that are sold. The Consumer Pricing Index is used to try and guess the measure of inflation and is used in figuring product increases from one year to the next. When the Fed meets to consider the Federal Reserve prime rate they use the numbers from the Gross National Product as one way to measure the economic outlook.

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