Posts Tagged ‘Billing’
Credit Cards – Two Cycle Billing and the Disappearing Grace Period
Credit Cards – Two Cycle Billing and the Disappearing Grace Period
Most people are unaware of the “two cycle” billing method used by many credit card issuers today. This billing method actually makes consumers pay interest twice for charges that they put on their credit cards. Two cycle billing can even apply to those consumers who pay their credit card balance off each month. That’s not all either; credit cards that have two cycle billing effectively rob card holders of their grace period if they carry a balance from month to month.
Almost all credit cards offer a grace period that allows consumers to pay off their charges without having to pay interest. For our example let’s assume its 30 days. So, if you were to make a 00 purchase in January 1st and pay it off in March 1st you would expect to pay interest for the month of February, right? With single cycle billing you will, however with two cycle billing you will pay interest for January and February.
Without getting too deep into the math, credit card companies charge interest on your average daily balance (balance divided by 30 days). If you pay your bill in full at the beginning of February, your next statement should have a zero balance. Two cycle billing calculates your interest on a 60 day average instead of dividing by 30 days. So, when your bill arrives in February you will pay your minimum payment, or your balance, plus interest for the first 30 days.
This interest charge on your first statement will actually be lower than the single billing cycle because it has been calculated with 60 days instead of 30 days. However, when your bill arrives in March you will receive another interest payment for the remainder of the 60 day cycle, regardless of your balance. The truth is, the difference in interest between the two methods is only a couple of bucks, assuming that you pay the 00 off in a month’s time. However, for those who carry a balance from month to month this additional interest can begin to add up. Not to mention the two cycle method will essentially rob you of your provisional grace period that is allowed on new purchases.
For example, when you carry a balance from month to month, your first statement will show your initial interest charges, less the original grace period. However, using the two cycle billing method, all new purchases will be added to the 60 day average and interest calculated on that new balance. This means, that even if you pay your new purchases off in full the next month, you will still be paying interest on them the following month.
The best way to avoid the double cycle billing is to read the fine print before you apply, and then simply avoid the cards that use this method. Where it gets tricky is; what if the card that you are considering has a significantly lower rate than a comparable card that uses the two cycle billing method? If you are someone who pays the balance off each month, it’s a no-brainer, take the lowest rate. Just be sure that you pay within the grace period. If you are considering a balance transfer, you need to realistically, calculate how long it will take you to pay off your credit card balance.
Balance transfers require some math, if you follow the link below to Direct Banc, you can use our balance transfer calculator to get a better idea of which card will be the best for you. As always, we suggest that you read the “fine print” before applying for any credit card to avoid any surprises. Remember, if you get a card that you don’t like, you can simply cancel the card when it arrives at no cost to you.
What is Two Cycle Billing?
What is Two Cycle Billing?
The term “two cycle billing” may not be common knowledge to all credit card users, but it is a concept that everyone should be aware of. Some issuers have been moving away from the average daily billing cycle and changing over to the two cycle way of calculating the interest earned on balances. Two cycle billing does not greatly affect users that tend the carry a balance, but it does however affect cardholders that pay there balance off monthly.
In order to understand two cycle billing you must first understand the average daily billing method, which will now be explained. Let’s say that you own a credit card with a 15% interest rate and your billing cycle for the month of April runs from the 1st through the 30th of the month. At the beginning of the month you have a balance of on the card. Now, on the 10th of April you make a purchase of 00, which means you are going to carry that balance for 20 days until the current billing cycle ends. You must now calculate the average daily balance for the month of April. To do so you must first multiply the balance of the card by the number of days the balance was carried (00 × 20 days = 20,000), then you will divide that number by the total days in the billing cycle (20,000 ÷ 30 = 666.67). You have now figured out that your average daily balance for April would be 6.67. If this card uses the average daily billing cycle and you started the month with a balance, there will be no interest charged as long as the April balance is paid off in full. This billing cycle essentially gives you a grace period on purchases as long as the balance is paid off in full each month. But, if this credit card uses the two cycle billing method, you would be charged interest for the month of April when you receive your bill in May because your average daily balance is based on the last 2 billing cycles. So, when you receive your bill for May, you will have a finance charge that is due, even though your balance was paid off in full for April and you didn’t make any purchases with the card in May. In order to figure out how much your interest would be, you will take the average daily balance × number of days in the billing cycle × periodic interest rate. Below are the calculations to figure out your interest due in May.
Average daily balance 1000 × 20 ÷ 61 = 327.87
Number of days in billing cycle 30 + 31 = 61
Periodic interest rate 15 ÷ 365 = .0411
Finance charge for May 327.87 × 61 × .000411 = 8.22
Based on the interest rate of 15% stated above, you will receive a bill in May that shows a finance charge of .22 even though the balance was paid in full in April. As you can now see, the two cycle billing method of calculating interest is not ideal for users that choose to pay there balance of in full each month. Essentially, a two cycle billing card will start charging interest from the day the purchases is made, which will eliminate the grace period that is provided by a card that uses the average daily billing method.
As you can now see, the two cycle billing method of calculating interest would mainly effect users that always pay their balance off in full because they will still be paying interest on purchases even when there is no balance being carried over on the card. So, next time you are looking for a new credit card make sure you look at the fine print to check for what type of billing method they use for that card.