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Avoid Credit Cards With Two-Cycle Average Daily Balance

When applying for a new credit card make sure you check how they calculate interest. Most cards use the average daily balance method, which is what you want, but some use the two-cycle average daily balance method. The difference will be huge if you don't pay off your balance in full and end up owing interest.

With the new Federal Reserve's credit card rules that go into effect February 22, 2010, credit card issuers will no longer be able to use two-cycle billing. You can read the full details of the changes at the Federal Reserve website.

If your credit card uses the average daily balance method, the interest is calculated by adding each days balance and then dividing by the total number of days in the billing cycle. Then this is multiplied by the interest rate. The two-cycle method takes the average daily balance of your past two statements, and multiplies it by the interest rate.

Let's say your balance for this month is $500, and for the previous month it was $300, and the annual interest rate is 15%. You paid your balance in full for the previous month, but you could not pay off the $500 for this month.

Under the average daily balance method you would owe: $6.25 in interest. Under the two-cycle average daily balance method you would owe: $10.00 in interest. The two-cycle method increases the amount of interest you owe in this example by 37.5%.

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