A basis point is one hundredth of a percentage point: 0.01%, or 0.0001 written as a decimal. One hundred basis points make one full percentage point. Finance counts in basis points because interest rates and yields move in slices far smaller than a whole percent, and "the rate went up a quarter point" is both clearer and less ambiguous said as "the rate went up 25 basis points."

Why finance needs a smaller unit

The problem basis points solve is ambiguity. If a savings rate "rises 1%," does it go from 4% to 5%, or from 4% to 4.04%? The first is a one percentage point move; the second is a 1% increase of the existing rate. Both are real things people mean by "1%," and in money that difference is enormous. Basis points remove the guesswork. A move "from 4.00% to 4.04%" is exactly 4 basis points, and nobody has to ask which kind of percent you meant.

The unit is small on purpose. A single basis point, 0.01%, sounds trivial, but on a large balance it is not. On a $400,000 mortgage, 25 basis points of extra interest is roughly $1,000 a year before compounding. On a bond fund managing billions, a few basis points of yield is real money. The whole point of the unit is to let people talk precisely about changes that are small in percentage terms and large in dollar terms.

You will hear the term shortened in practice. Traders write it "bps" and often say "bips" out loud, so "the yield rose five bips" means a move of 5 basis points, or 0.05 percentage points. The shorthand matters because the places you meet basis points, loan desks, bond markets, fund fact sheets, are exactly the places where a sloppy "one percent" would cost someone money.

A worked example: the Fed's September move

The clearest recent example is the Federal Reserve. On September 16, 2026, the Federal Open Market Committee said it had decided "to raise the target range for the federal funds rate by 1/4 percentage point to 3-3/4 to 4 percent." A quarter of a percentage point is 25 basis points, and that is how markets and reporters described the move: a 25 basis point hike, taking the target range to 3.75% to 4.00% from 3.50% to 3.75%.

That one decision then ripples through rates that are themselves quoted in basis points: the prime rate banks charge their best customers, variable credit-card APRs, and the yields on Treasury bonds. For how the Fed's rate feeds into what you actually pay, see our guide on how the Federal Reserve works and the link between the fed funds rate and the prime rate.

Where you meet basis points

You run into the unit more often than you might think:

• Mortgages and loans: a lender might offer to cut your rate by 50 basis points, meaning half a percentage point.
• Savings and CDs: a bank raising its annual percentage yield from 4.20% to 4.45% has added 25 basis points.
• Bond yields: the 10-year Treasury "backing up 10 basis points" means its yield rose by 0.10 percentage points.
• Fund fees: an exchange-traded fund with an expense ratio of 0.03% charges 3 basis points a year; one at 0.75% charges 75.

A worked comparison

Say two lenders quote you a 30-year mortgage on $400,000. One offers 6.00% and the other 6.25%. The gap is 25 basis points, a quarter of a percentage point. It sounds small, and on the monthly payment it is: roughly $65 more a month at the higher rate. Over the full term, though, that quarter point adds up to tens of thousands of dollars in extra interest, which is why shaving even 25 basis points off a rate is worth real effort. The same logic runs in your favor on savings: a bank that lifts its annual percentage yield from 4.20% to 4.45% has handed you 25 basis points, and on a $50,000 balance that is about $125 more a year, before compounding. For a live read on one of those numbers, see our 30-year mortgage rate tracker.

The percent-of-a-percent trap

The single most useful thing basis points do is separate an absolute change from a relative one. Going from a 4% rate to a 5% rate is a 100 basis point rise in absolute terms. It is also a 25% increase relative to the starting rate. Both statements are true, and confusing them is how people end up badly wrong about how much something changed. Basis points always describe the absolute move, which is why rate-setters, traders and lenders reach for them.

What to watch

When a number is quoted to you in basis points, convert it in your head to decide whether it matters: divide by 100 to get the percentage point change. Twenty-five basis points is a quarter point; 50 is a half point; 100 is a full point. Then translate that into dollars on the balance that actually concerns you, because the same basis point move is a rounding error on a small savings account and a meaningful cost on a large mortgage. The habit is worth building, because once you think in basis points you stop being surprised by headlines. A central bank that moves 25 at a time, a bond yield that drifts 10 in an afternoon, a fund that trims its fee by 5: these are small, precise steps, and reading them that way keeps you from either shrugging off a change that matters or panicking over one that does not.