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Two-cycle billing
squeezes credit-card holders
By Lucy
Lazarony • Bankrate.com
Credit card companies who use two-cycle
billing could sting some of their responsible customers the most.
If their customers are people who typically pay off their cards
but are caught by a balance once or twice a year, they may be slammed
with steep finance charges.
Two-cycle billing is something most people don't understand, said
Linda Sherry, editorial director of Consumer Action, a San Francisco-based
consumer advocacy group. "We usually tell people to watch for
it in solicitations and avoid it," she said.
Most cards offer a grace period right after the purchase is made
on a card with a $0 balance. A grace period is a short period after
a purchase is made when interest is not charged. If you start the
billing period with a zero balance and payment is made in full by
the end of the grace period, no interest is charged. But if only
a partial payment is made, interest kicks in at the end of the grace
period.
Grace
period wiped out
Carrying a balance on any credit card always wipes out the grace
period on new purchases. Carry a balance and the interest clock
starts ticking from the day of each new purchase. But with two-cycle
billing, the effect can be more dramatic, or rather expensive, because
it will charge interest all the way back to the date you first made
the purchase -- even if it's the month before. That means interest
becomes retroactive, back to the purchase date.
An average daily balance is determined by adding each day's balance
and then dividing that total by the number of days in a billing
cycle. The average daily balance is then multiplied by a card's
monthly periodic rate, which is calculated by dividing the annual
percentage rate by 12.
A card with an annual rate of 18 percent would have a monthly periodic
rate of 1.5 percent. If that card had a $500 average daily balance
it would yield a monthly finance charge of $7.50.
How two-cycle billing calculates
With the two-cycle method, the average daily balance is calculated
from two billing cycles rather than one and finance charges are
typically higher.
"It's going to cost you more if you carry a balance," Sherry said.
"It may not be that much more, but it's still going to cost you."
Credit card agreements clearly state the method of interest calculation,
but most people don't look beyond the annual fee and interest rate.
Gerri Detweiler, author of The Ultimate Credit Handbook and
president of Ultimate Credit Card Solutions Inc., said people who
carry a balance once or twice a year are often the hardest hit by
credit cards that use two-cycle average daily balance.
Detweiler first learned of two-cycle average daily balance a few
years ago when a woman wrote to her after being socked with a high
finance charge after purchasing some jewelry on her credit card.
Before buying the jewelry, which cost a few thousand dollars, the
woman's credit card balance had been zero. The finance charges were
twice as high as she expected.
How could this happen? Let's take a look.
When interest starts adding up
Imagine starting off the month of January with a zero balance on
a credit card. A purchase is then made with the card on Jan. 10
and is not paid off in full with a billing statement that arrives
in early February.
"With average daily balance, because you started at zero, the interest
clock won't start ticking until Feb. 1," Detweiler said.
When the March credit card bill arrives, interest will be charged
based on the daily balance held on the account through the month
of February, minus any payments.
With two-cycle average daily balance,
the March bill will have finance charges based on the average daily
balance since the purchase date of Jan. 10.
Detweiler pointed out with the two-cycle method, a purchase made
near the beginning of a billing cycle will end up costing a cardholder
more than if that same purchase was made near the end of the billing
cycle.
Can cost twice as much
"Depending on when you make the purchase, it can cost you almost
twice as much," Detweiler said. "Your best bet is to find out when
the closing date is on the billing cycle and try to make a purchase
one or two days before the closing date."
When looking at credit card offers experts suggest weighing the
finance charge calculation method along with the annual fees and
annual percentage rates. People should also consider how they plan
to use the card and whether they typically a carry a balance.
For example, for someone who carries a
balance each month, a card that uses the two-cycle method with a
very low rate may be a better deal than a card that uses the one-cycle
method and has a higher rate.
"If you have a card with two-cycle average daily balance and a low
APR and you know you're going to carry a balance for a long time,
don't worry about it," Detweiler said. "On the other hand, if you
carry a balance at certain times of the year, you're probably better
off with a card that uses the average daily balance method."
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