Most people are unaware of the “two cycle” billing method used by many credit card issuers today. This billing method actually makes consumers pay interest twice for charges that they put on their credit cards. Two cycle billing can even apply to those consumers who pay their credit card balance off each month. That’s not all either; credit cards that have two cycle billing effectively rob card holders of their grace period if they carry a balance from month to month.
Almost all credit cards offer a grace period that allows consumers to pay off their charges without having to pay interest. For our example let’s assume its 30 days. So, if you were to make a $1000 purchase in January 1st and pay it off in March 1st you would expect to pay interest for the month of February, right? With single cycle billing you will, however with two cycle billing you will pay interest for January and February.
Without getting too deep into the math, credit card companies charge interest on your average daily balance (balance divided by 30 days). If you pay your bill in full at the beginning of February, your next statement should have a zero balance. Two cycle billing calculates your interest on a 60 day average instead of dividing by 30 days. So, when your bill arrives in February you will pay your minimum payment, or your balance, plus interest for the first 30 days.
This interest charge on your first statement will actually be lower than the single billing cycle because it has been calculated with 60 days instead of 30 days. However, when your bill arrives in March you will receive another interest payment for the remainder of the 60 day cycle, regardless of your balance. The truth is, the difference in interest between the two methods is only a couple of bucks, assuming that you pay the $1000 off in a month’s time. However, for those who carry a balance from month to month this additional interest can begin to add up. Not to mention the two cycle method will essentially rob you of your provisional grace period that is allowed on new purchases.
For example, when you carry a balance from month to month, your first statement will show your initial interest charges, less the original grace period. However, using the two cycle billing method, all new purchases will be added to the 60 day average and interest calculated on that new balance. This means, that even if you pay your new purchases off in full the next month, you will still be paying interest on them the following month.
The best way to avoid the double cycle billing is to read the fine print before you apply, and then simply avoid the cards that use this method. Where it gets tricky is; what if the card that you are considering has a significantly lower rate than a comparable card that uses the two cycle billing method? If you are someone who pays the balance off each month, it’s a no-brainer, take the lowest rate. Just be sure that you pay within the grace period. If you are considering a balance transfer, you need to realistically, calculate how long it will take you to pay off your credit card balance.
Balance transfers require some math, if you follow the link below to Direct Banc, you can use our balance transfer calculator to get a better idea of which card will be the best for you. As always, we suggest that you read the “fine print” before applying for any credit card to avoid any surprises. Remember, if you get a card that you don’t like, you can simply cancel the card when it arrives at no cost to you.
Aubrey Clark is an Author and editor for Direct Banc, a directory of low interest rate credit cards, specializing in credit cards for fair credit. Aubrey is a native of Destin, Florida but now lives in Atlanta Georgia since 1999 with his wife and four children.
Interest/APR/credit card math problem...something like that? [for a high school pre-calculus student]?
Here's the question:
You have credit card charges totaling $15,750. The interest rate of your card is 10.5% APR. They tell you the minimum payment is $135. The amount of interest due each month is figured as:
Current Balance x (yearly APR/1200)
(Here the APR is not changed to a decimal.) The remaining amount is applied to lowering the principal (the current balance).
1. Make a table that shows the months, the interest paid, and the new current balance. Use a computer spreadsheet with the following headings:
Month / Current Balance / Interest / Amt applied to principal
2. Will you ever get out of debt with the credit card company? If so, when? If no, why not?
3. Make a new table with a minimum payment of $150
a. Will you ever be out of debt?
b. If not, why not? If so, when?
c. How much interest will you have paid over the time of the loan?
Formulas to use for 3b and 3c:
3b. U = M- (M-Pr/12) (1+r/12)^12t
U= unpaid balance
M= monthly payment
P= amount borrowed
t= time (years)
r= rate (decimal form)
3c. U= P [rt/1-(1/1+r/12)^12t -1]
U= total interest paid
CAN SOMEONE PLEASE EXPLAIN THIS MESS TO ME?!?!?
Answer
There's a lot here -- I'm going to start (I never know if people really check back). I'll assume you know some spreadsheet lingo.
Put the titles (Month, Balance, etc.) in row 1 columns A, B, C, D.
Start with 0 (month 0) in A2
Start with the 15,750 (balance) in B2.
Put 0 in C2 and D2 (nothing's happened yet).
That completes row 2, which is just the initial balance.
Row 3 is month 1. Put 1 (month 1) in A3. The interest (C3) is going to be the old balance (B2) times the interest rate (10.5/1200). So C3 is +B2*10.5/1200.
The new balance (B3) is the old balance (B2) plus the interest (C3) minus the payment (135). So B3 = +B2+B3-135.
The amount paid to the principal (D3) is the payment (135) less what went to interest (C3) so D3 is =135-C3.
That completes row 3.
You now can copy row 3 down (spreadsheet lingo) to find out how it will go in the future. And the miracles of spreadsheets work.
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