What rate? OMG, I’m confused!

I am trying to set up a debt reduction plan where I pay off the account with the highest interest rate first, then move to the next highest, etc.

My question is, which interest rate on my credit card statement do I use for this prioritization? There’s an Annual Percentage Rate and an Effective Percentage Rate and then I think there was still another. On one of my cards, these range from like 8% to 29% depending on which one you look at. It’s a shame I’m such an idiot when it comes to these things ! Thanks for any help…

Good question, you shouldn’t feel so bad about not knowing what is what when it comes to credit cards. They can be a dangerous tool as I’m sure you are now finding out. You’re right on with trying to reduce debt, starting with the highest intrest rate and working yourself down.

Both rates, the annual percentage rate (APR) and the effective interest rate (EIR) are both the same rates. Confused? So is the majority of everyone else.

An APR is a way to standardize and compare interest rates among lenders. It is an annualized rate that takes into account the total cost of borrowing. It is intended to standardize rates, as stated before.

The EIR is the rate you’re paying compounded X number of times per year, usually 12. Compounding means that every month, your balance is averaged (depending on the card and terms and conditions) and that amount is used to calculate the finance charges next month.

The other interest rates are probably rates like balance transfer or cash advances, etc. Don’t worry about those when comparing the cards.

To answer your question, in terms of comparing to another card, you should use the APR. The card with the highest APR should be paid off first, repeat this until you’ve got it all paid off.

Answering Yahoo

Occasionally I go to Yahoo! Answers to read the questions that various users submit, mostly with personal finance. Unfortunately, there are a lot of dumb questions and a lot more questions about working from home (which can be as equally dumb). However, every now and then you get a gem that I like to try to answer. The following is a question that I feel many people can relate to unfortunately.

I have a large debt to the irs, a garnishment on my wages and at least another 10,000 in other debt. I was just laid off of my second full time job, although I am looking for another………… what services or other options do I have to fix these issues. Between the garnishment, and the irs debt I cant make it on just one job.

Sadly, most people can be insensitive and quickly judge this person for all of the wrong reasons. Of course, getting a job or stop spending would be the easy answer. For a person in this situation, that’s not the full answer.

First, wage garnishment isn’t pretty. According to the government, garnishment is usually ordered by a court and cannot exceed 25% of a person’s disposable income (net income). My advice on this would be to talk with the IRS and see if a more agreeable settlement option can be made.

At least in the state of Ohio, where I live, they offer a program to settle debt if you face certain conditions. These conditions are economic hardship or doubt of collectability. It’s always worth a shot to try to explain things from your point of view.

As for finding someone to help you with your issues, you should contact the NFCC – The National Foundation for Credit Counseling. They can put you in touch with local companies that provide credit counseling services. They would be more experienced with such issues that you have and could offer you better and more personalized advice than I can.