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Ask Dr. Don
By Don Taylor, Ph.D., CFA • Bankrate.com
Dear Dr. Don,
I understand that it's unfavorable
to sign up for a credit card using a two-cycle average daily balance
method of calculating interest charges due to the fact that the
grace period essentially disappears for the new purchases. However,
if I can get a card with a 3.9 percent APR on two-cycle billing
vs. 4.9 percent APR on single-cycle billing, wouldn't it make sense
to go with the card with two-cycle billing, especially if I'm not
going to make any new purchases on this card? I just plan to do
a balance transfer to get a lower interest rate while paying down
my outstanding balances.
Mike Limbo
Dear Limbo,
With two-cycle billing, the average daily balance used to calculate
interest charges is calculated from two billing cycles rather than
one. This approach to calculating interest effectively wipes out
the grace period for customers who carry a balance. Two-cycle billing
is expensive for people who only sometimes carry balances. (Check
out our glossary
of credit card terms.)
In comparing the two types of cards, remember
that you'll be paying interest on the average of the two cycles.
Let's say you transfer $5,000 to the two-cycle card and plan to
pay down your outstanding balance by $500 per month. Your average
balance for the first cycle is $5,000 and you owe $15.95 in interest,
so you pay $515.95 and have a $4,500 outstanding balance. At the
end of the second billing cycle, the credit card issuer calculates
interest due based on the average balance for the two periods, or
$4,750, and your interest payment is $15.15. You've paid $31.10
in interest. With a one-cycle card at 4.9 percent APR, you pay $19.95
in interest the first month and $17.96 in the second month, for
a total of $37.91. The two-cycle card has saved you $6.81 over the
two periods.
If you are transferring a significant balance,
it's likely that you'll still be carrying a balance at the end of
the introductory rate period. The interest rate that the card will
carry when the teaser rate no longer applies is very important to
your decision. You may be subject to a balance transfer fee to move
outstanding balances from one card to another. The banks don't want
you moving balances from one teaser rate to another.
If an introductory rate period allows you to
jump-start paying down your outstanding balance, then it may be
the right thing to do. But if the fully indexed rate -- the rate
after the teaser expires -- is above what you would pay elsewhere,
you may not be ahead of the game. To find the card that best meets
your needs, use our credit card search
engine.
Bankrate.com writers base their answers on our editorial
content and advice of financial professionals. We make no claims
or representations about the accuracy, timeliness or completeness
of such content, advice or the answers provided to you. Our content,
advice and answers are intended only to assist you with your financial
decisions. However, by its nature such information is broad in scope.
Your financial situation is unique, and our content, advice and
answers may not be appropriate for your situation. Accordingly,
we recommend that you get different opinions and seek the advice
of your accountant and other financial advisers before making any
final decisions or implementing any financial or investment strategy.
-- Posted: Sept. 3, 1999
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