What is a basis point? One-hundredth of a percent, explained

What a basis point is

Cambridge Dictionary defines a basis point as one-hundredth of one percent, especially in talking about interest rates.

The reason for the word is clarity. Saying a rate rose by 1% might mean it went from 4% to 5%, or from 4% to 4.04%. Saying it rose by 25 basis points leaves no doubt: it rose by a quarter of a percentage point.

How to convert

Divide basis points by 100 to get percentage points. 25 basis points is 0.25 points, 50 is 0.50 and 100 is 1.00. Going the other way, multiply by 100.

You see them in news about the Federal Reserve, where changes are often in steps like 25 or 50 basis points, and in loan offers and savings account rates.

What a change costs you

Multiply the balance by the change. On a $10,000 savings balance, 25 basis points is $25 a year. On a $300,000 mortgage, the same 25 basis points on the rate is $750 a year in interest, at the start.

For a couple with a joint account and a shared loan, small differences add up on larger balances. A savings account that pays 50 basis points more on $10,000 gives you $50 a year.

A worked example: 25 basis points on a savings account

• A savings account pays 4.50% a year on $10,000.
• Yearly interest: $10,000 x 4.50% = $450.
• The rate rises 25 basis points: 25 / 100 = 0.25 points, so 4.50% + 0.25% = 4.75%.
• New yearly interest: $10,000 x 4.75% = $475.
• Difference: $475 - $450 = $25 a year.