What's the Peculiarity of Credit Card Deals with Two-Cycle Billing?

Credit card industry is all about secrets and hidden icebergs. Just one false step and you are in debts. Very often, credit cardholders haven't the slightest idea about practices that may be so dangerous for their financial well-being. Two-cycle billing is one of the most important points that every cardholder should be aware of. As a rule, credit users are not so scrupulous about such details. That's why they're totally confused about the bills after their balance is paid off. The difference between one-cycle and two-cycle billings is not so vivid at first sight. Oddly enough, it may affect those diligent cardholders who pay off the balance every month.

The thing is, while making credit card deals, most credit card users don't pay attention to the method of calculation their average daily balance. In order to better understand how two-cycle billing works, let's start with one-cycle billing that is more common to credit cardholders.

So, let's assume that you carry a card with a 13% interest rate and your billing cycle amounts to a month. At the beginning of September your balance on credit card is $0. On the 15th of September you decide to make a purchase of $1,500, meaning you will carry this balance for 15 days until your billing cycle ends.

Let's do some math and calculate the average daily balance for September. Multiply the credit card balance by the number of the days you will carry this balance ($1,500 x 15 days = 22,500). After that, divide this number by the total days in the current billing cycle (22,500/30 = 750). So, the average daily balance for the month of September will be $750.

If you started the month with a 0$ balance, and your credit card company uses the average daily billing cycle, you will pay no interest charges as long as your balance in September is paid off. One-cycle billing gives you a grace period of 20-25 days on purchases in case you pay off the balance in full every month.

Now, let's assume that this credit card has two-cycle billing, what will be your interest charge then? Even if you made no purchases in May, you will face an interest charge, as your daily average balance will be based on the last two billing cycles.

Then your finance charge will be calculated like that! You multiply the average daily balance by the number of days in billing cycle and periodic interest rate. Number of days in billing cycle will be 61 (30 + 31 = 61), your average daily balance will be ($1,500 x 20/61 = 491.8), and periodic interest rate will be (13/ 365 = .0365). So, your finance charge for May will be $10.94 (491.8 x 61 x .000365 = 10.94).

Now, you can see the difference between these two methods. And it's definitely unfavorable for credit users who prefer to pay their balance in full every month. However, for those people who carry a balance from month to month, there will be no significant difference. Generally, it's a couple of dollars or something like that.

However, if your financial goal is to stay debt-free, be careful with credit card offers implying two-cycle billing. In order to find out what method your company uses, check this information in your credit card statement, in the section "Finance Charges." If you don't want to pay extra interest charges, pay close attention to this point.

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