Prime rate: What is it? Why does it impact your credit card rates?

Credit card interest rates are on the rise. At Credit.com we've been tracking increased APR's for the last few months. It's a lot of work to update all our credit card offers, so we definitely take notice when there are changes. What is driving these increases?

Many credit card interest rates are rising because they are directly tied to the "prime rate." The prime rate is determined by the Wall Street Journal surveying the top 30 leading banks to see what rates they are offering to their best customers. When 75% of the banks change their rates, a new prime rate is published. Prime rates move up and down in coordination with short-term interest rates set by the Federal Reserve Board.

Currently, the prime rate is 7.5%. Last month, the prime rate was 7.25% and a year ago this rate was 5.5%. Aside from a brief increase at the end of 2005, this is the highest the prime rate has been since 2001.

It's common for credit card offers to be listed as "prime plus" as in the prime rate plus 2% to 15% on average. Most credit card offers range from 9% to 22% APR right now because of the prime rate. You will also see references to "prime plus" with student loans and auto loans. You can check the "Schumer's Box" on your next credit card statement or look for the "Rates & Terms" link online to see where your credit card APR currently stands.