Definition
Prime is a classification of risk, in which applicants who demonstrate the highest levels of creditworthiness receive the best rate, known as prime rate.
Analysis
A prime rate is a preferred interest rate that is extended to applicants that represent a very low risk of default. Prime rate is adjusted for external market forces such as inflation, competition and from manipulation by the Federal Reserve.
Most lenders utilize risk-based pricing, in which lenders will add a certain amount to prime rate to compensate for perceived levels of higher risk. This is very common for credit cards and for other consumer loans, in which the lender may offer credit at prime plus additional percentage points of interest.
Prime customers generally have credit scores that are well over 700. Consumers that represent elevated risk of default are classified as subprime, and may have credit scores anywhere from 630 to 500 or even below.
