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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 $0 on the card. Now, on the 10th of April you make a purchase of $1000, 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 ($1000 × 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 $666.67. If this card uses the average daily billing cycle and you started the month with a $0 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 offers 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 $8.22 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.

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