The prime rate is a general term that applies to the short term interest rate used by banks in the United States. Various countries of the world implement the concept of a lending rate index but call it by a different name, such as the LIBOR rate of England. The United States prime rate, which is published by the Wall Street Journal (WSJ), is 3 percentage points or 300 basis points higher than the rate banks charge each other for short term loans, the federal funds rate.

Historically, the rate was determined by surveying 30 of the largest banks in the United States. When at least 23 of those banks modified their lending rate, the WSJ would follow suit and revise the published rate. Since December 16, 2008, this method has changed. The WSJ now only surveys the 10 largest banks in the United States. When a minimum of seven of those banks modify their rate, the WSJ updates the published rate.

Many financial institutions in the United States use the prime rate as an index for some situations that fit in the following categories:

--      Credit cards with variable rates

--      Lines of credit for home equity

--      Mortgages with adjustable rates

--      Business loans for small and mid-sized companies

--      Personal loans

--      Car loans with variable rates

--      Education loans with variable rates

--      Loans used for debt consolidation

The Federal Open Market Committee of the Federal Reserve has scheduled meetings approximately every six weeks to discuss the state of the national economy and whether or not a prime rate increase or decrease is warranted. If economic conditions require it, the committee may also hold non-scheduled, emergency monetary policy meetings.