Good-bye Two-Cycle Biling

Ask the Experts: What is two-cycle billing?


Most credit cards compute any applicable finance charge using a single-cycle billing formula (generally a month), where the average daily balance for the cycle is multiplied by the daily interest rate and the number of days in that cycle. Assuming that you had no balance carryover from the previous billing cycle, are given a grace period, and pay your balance in full, you incur no interest charge on purchases you made during that cycle. And if you make no purchases in the following cycle, you incur no finance charge for that cycle either, because your average daily balance for that cycle is zero.

Two-cycle billing, however, computes the finance charge based on the average daily balance over two billing periods. If you consistently carry a balance, you won't experience much difference between single-cycle and two-cycle billing finance charges. However, if you incur charges in the first cycle, pay them in full by the due date, and incur no new charges in the second cycle, under the two-cycle billing method, you'll still owe a finance charge for the second cycle. Why? Because, under two-cycle billing, your average daily balance isn't zero for the second cycle.

Here's a simple example: assume no previous balance and a $10,000 purchase (you bought a living room suite for your new home) on the first day of the first 30-day cycle that's paid in full on the last day of that cycle. Further assume a second 30-day cycle during which you make no purchases. Your average daily balance for the second 30-day cycle under the two-cycle billing method is $5,000 ($10,000 times 30 days, divided by 60 days). At an annual rate of 18% (0.0493% daily), the finance charge for the second 30-day cycle would be $73.95 ($5,000 times 0.000493 times 30).

As of February 2010, creditors will no longer be allowed to use two-cycle billing.