Wall Street Journal prime rate (WSJ Prime Rate), or Prime lending rate, is a benchmark rate published by The Wall Street Journal (WSJ) based on a market survey. It is computed by taking into average the various prime rates that the ten biggest banks of the US charge from their best credit quality customers. It is the charge on relatively short-term maturity loans. The Journal surveys the big banks, and when data changes, the Journal changes its rate, which stands effective from publication date.
As per ‘Third Amendment to Credit Agreement’ on the SEC portal “, Prime Rate” is defined as a per annum rate of interest equal to the “prime rate,” for any day, as put out in the “Money Rates” column of The Wall Street Journal, frequently. It also states that if for any reason the rate is not available, it shall be reasonably established by lenders. The rate is to change effective from the date on which any change is published in the Journal or as established by the lender, whichever is fitting. It is to be considered only as a reference rate and not as a representation of the lowest or best rate charged to any borrower/customer in reality.
The WSJ-prime rate is commonly accepted and tailed across the banking and financing industry. It is a vital index used by banks to set rates on various consumer loan products. The variable credit rates, in banking products, follow up & down movements in the prime rate. Generally, it is the lowest rate banks charge to their creditworthy customers and other banks.
Banks use the prime rate as a standard rate for variable credit products. Bank products applying the prime rate directly or indirectly include mortgages, home loans, credit cards & auto loans. Products with an Indexed interest rate also quote interest based on WSJ-prime rate with a spread based upon the borrower’s credit summary. Credit card issuers pin variable-rate cards’ interest to the prime rate, with additional margin decided by banks according to the risk profile of a consumer or his credibility to the bank. In a variable rate credit loan, the margin doesn’t change over the life of the loan; however, the variable portion is attuned to the change in the underlying indexed rate. This brings a lot of difference for the borrowing party. As WSJ- Prime rate is available publically, borrowers prefer products based on the WSJ- Prime rate. Other similar indexes used by the industry are LIBOR and US Treasury Rate.
For example, take a credit card issued by Citi Group to an American borrower. The credit card balance is variable based on an annual percentage rate. The borrower’s margin supposes 10% plus the indexed rate. Now, if the indexed rate here is WSJ- Prime Rate, then if WSJ- prime rate is 4%, the interest rate charged to cardholder will be 14%. If the WSJ-prime rate increases to 5%, the credit card interest rate would go up to 15%. If the WSJ-Prime rate decreases to 3%, the credit card holder will be charged 13% by Citi Group.
Various other indices also quote a prime rate, but WSJ prime rate is the most used one. It generally matches its movement up or down with fluctuations in the Fed’s fund rates. Fed Funds rates are set by Federal Open Market Committee (FOMC). It is affected by the cost of borrowing of banks, passed on to borrowers as the interest rate on loans.
The WSJ Prime Rate does not change often. Fluctuations are mostly followed by variation in Fed Funds Rate. To obtain the current and historical Rates, one can visit the Market Data Center section of the Wall Street Journal website.
WSJ- prime rate is not just important to Banks, Financing organizations, economists, or the readers of the Wall Street Journal but hold importance in everyday life. This is because it is a key pointer to the cost of end-user borrowing. Any retail loan in the US, having a variable interest, is affected by the prime rate issued in WSJ. Right from Credit cards held by more than half of US population to adjustable-rate mortgages on property, all are impacted by prime rate fluctuations. Thus, If WSJ Prime Rate goes up, consumer loan interest rates go up too.
Credit customers' borrowing costs are a result of their credit scores. If one has an excellent credit history, he/she will be charged a lower “margin" over the prime rate. Exceptionally good credit scores may also qualify for prime rate lending, having no additional charges above the prime rate. But if a consumer’s credit score is low, he/ she shall have to pay a higher spread on even small-sized borrowings. Thus, if the prime rate moves up, costs of borrowing shall shoot up significantly in some cases. The costs then will be considerably high for people with lower credit scores compared to customers with better credit rating.
It can also affect the demand and supply of credit in the market. If variable loans, often taken for short term needs, become costlier, their demand shall fall. This may, in turn, result in the closing of various bank credit schemes. Thus, WSJ- Prime rate holds important for economic balance in the US.
Daily monitoring of WSJ Prime Rate is not needed, but depending on financial needs, one may pay attention to its recent movements. Depending on the prevailing WSJ prime rate-
The prime rate has affected the US economy in the 2008 financial crisis (caused by mortgaged loans) and recently, causing economic chaos amidst the pandemic. Right from small borrowers to big corporations are affected by it. The smallest change in the prime rate can thus bring big economic shifts.