Two Cycle Credit Cards

Mailboxes have been filled with what appears to be a great credit card solicitation. Recipients are given the “opportunity” to consolidate their debt from other credit cards at 5.9 % annual percentage rate for up to a year and 16.9% percentage rate thereafter. However, when queried closely, bank card representatives reveal the new credit card uses a “two-cycle billing method.”

Actual Percentage Rates

Credit-card issuers have developed some very confusing and expensive ways to calculate finance charges. Moreover, while the stated Annual Percentage Rate (APR) on two credit cards may be the same, the finance charges on each may differ dramatically.

The different finance charges are the result of different balance calculation methods. The finance charge is determined by the way the card issuer computes the balance on which interest will be charged. Although the Truth in Lending Act requires lenders to express interest rates in a standard measure – the APR – it does NOT define the “amount outstanding” on which this interest is charged.

Two-cycle Calculations

A two-cycle average daily balance is calculated by adding the average daily balances for two billing cycles: the current cycle and the previous one. The first balance is for the current billing cycle and is figured by adding the outstanding balance (including new purchases and deducting payments and credits) for each day in the billing cycle and then dividing by the number of days in the billing cycle. The second balance is for the preceding billing cycle and is figured in the same way as the first balance.

How Great Is the Difference?

The two-cycle method is designed to recoup interest for those months in which a consumer did not pay off a new purchase in full, but it was not charged interest on those new purchases because the previous month's new balance was paid in full.

Here is an example: A consumer starts the first month with a zero balance and charges $1,000 during the month; he pays off only the minimum amount due. The next month he charges another $1,000, then pays off the entire balance. This same pattern is repeated three more times during the year. Here is what the cost would be when using four different balance calculation methods:

• Average Daily Balance (excluding new purchases): $66
• Average Daily Balance (including new purchases): $132
• Two-cycle average daily balance (excluding new purchases): $131.20
• Two-cycle average daily balance (including new purchases): $196.20

Check Your Card Issuers

If a consumer starts the month with a previous balance of zero, all new purchases will not accrue finance charges in that billing cycle. If those purchases are not paid in full by the due date, the issuer using the two-cycle method will include them in the average daily balance for the current month (like other issuers do) but will also figure an average daily balance for the previous month and levy a finance charge for that balance as well.

This method is substantially more expensive than the other methods for those who sometimes pay in full and sometimes pay only the minimum. Consumers who always resolve a balance or who always pay in full will not be affected by the two-cycle billings. However, card-holders do not always pay as planned. Be sure any changes offered in your credit card are beneficial, not harmful, based on your typical and expected credit usage.