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How the Two Cycle Daily Balance Interest Calculation Increased Consumers Rates

The Two cycle average daily balance method for calculating accrued interest is no longer permitted. This article details how the two cycle interest rate caused consumers to pay more in interest fees.

Before 2010 banks and financial institutions were able to use a system of calculating interest on credit accounts at a much higher rate with the two-cycle average daily balance method. This method took into account the previous two statement balances when calculating the amount of interest owed. This process of figuring interest was eliminated under the Federal Reserve's credit card rules that went into effect February 22, 2010.

How the Two Cycle Method Worked

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%.