How Two-Cycle Billing Works

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Most credit cards use the single billing cycle when calculating your average daily balance. There’s a few cards out there (Discover is one of them) that use the two-cycle billing method when computing your average daily balance. What’s the difference? Let’s take a look and find out.

Single-Cycle Billing

Let’s say you have a credit card with no balance. You have just graduated from college and have a big interview coming up which is going to require a new suit (or dress). You haven’t the cash to pay for this suit so you charge it to your credit card with the plan to pay it back over the next few months. So, on July 10th, you charge $1,000 on your card that had a previous balance of $0. This is what your transaction log looks like:

Credit Card Transactions for July

You get the bill and see that your minimum payment is $20 and that it is due on August 26. You decide to pay $100 per month and you pay it on time. Your August transaction log looks like this:

Credit Card Transactions for August

How to calculate your average daily balance

Notice that the payment is made on the 26, which lowers your balance due by $100. Notice for the billing cycle that you had 27 days with a balance of $1,000.00 and 4 days with a balance of $900.00. As you can tell from this example, there are 31 days in the billing cycle. Your average daily balance is $987.10, which is calculated by adding up the balance for each day and dividing by the number of days in the billing cycle.

How to calculate your monthly interest charges (periodic interest charge)

Your APR on this card is 18.00%, which makes your periodic rate 0.04932% (18.00% ÷ 365 = 0.04932%). To calculate the periodic interest for the month of August, take the average daily balance × the number of days in the billing cycle × the periodic interest rate. It looks like this:

$987.10 × 31 × 0.04932% = $15.09

That $15.09 gets added to your balance so you start the month of September off by owing $915.09.

Two-Cycle Billing

With two-cycle billing, the credit card company uses two months to calculate the average daily balance. So, using the same numbers as above but adjusting them to reflect two-cycle billing, we get:

Two-Cycle Credit Card Billing Example

The month of August would look like this:

Two-Cycle Credit Card Billing Example

Based on this limited information, it looks like two-cycle billing is the better deal. It’s not, at least not in the long-run. Why? Because you are essentially paying interest on a balance you already paid off. Let’s go back to our example to see what I mean. Let’s say you continue paying $100 per month for the next few months and you don’t add any new charges. Then, in January you decide to pay off the balance on the card as follows:

Paying Off The Single-Cycle Card

Two-Cycle Credit Card Billing Example

Your final payment would have been $561.53. Now, depending on the credit card, you may be on the hook for any unpaid interest. In this case, we’ll assume the worst and say that you still owe an additional $7.48, which you will pay off the following month. This brings the total interest paid to $69.01 (July – January).

Paying Off The Two-Cycle Card

Two-Cycle Credit Card Billing Example

On the two-cycle card, your final payment would have been $561.43 and you would still owe an additional $8.60 in unpaid interest, bringing your total interest paid to $70.03 (a WHOLE $1.02 MORE than the single-cycle card).

So, although it doesn’t seem like that big of a difference, it can be significant if you carry a large balance. Two-cycle billing also hurts those who pay a lot off in one month but don’t extinguish the entire debt, leaving a balance for the next month. Naturally, if it’s bad for the card holder, it’s good for the credit card company.

It’s best not to carry a credit card balance at all. However, if that’s not possible, consider using a credit card that doesn’t utilize two-cycle billing (in other words, avoid Discover). Finally, avoid paying just the minimum payment.

35 thoughts on “How Two-Cycle Billing Works”

  1. Lawrence,

    I’m not sure about ALL Discover Cards, but the two that my wife and I had used two-cycle billing. Although I searched Discover’s website, I could not find information on their other cards. They don’t really like to make that stuff easy to find.

  2. Hi JLP,

    Thanks for this post, very interesting info. I have to say though, I’m nowhere near being a financial analyst, and I’m very perplexed by your xl examples. The July/Aug numbers look identical to me for both single and double-cycle, except for the totals at the bottom, and I have no idea how you came up with those. What two cycles does Discover use? Do they add August and a hypothetical September? Or August and July? Does that mean they wait an extra month at the beginning before they start billing you?

    Also, could you give a quick example of how this problem scales with a higher balance? I know compounding makes interest payment (or debt) grow significantly over time, but say given a $10k balance paid off over 2 years, how much difference does this make?


  3. Foof,
    To get a rough idea of what it would be, multiply all the numbers by 10. Therefore, for a starting balance of 10k, in this example, interest would be $10. more, carry the same calculations further for a two year time span. Obviously, the larger the balance and the longer the pay-off time, the bigger the difference.

    Regarding how the averaging works, one averages the daily balance over one month, the other over two, all with actual numbers, so obviously the first month the account is open either would look like a single cycle billing calculation. But as soon as there are two historical months on the account, the average daily balance is averaged over two months as opposed to one. Again, not a huge difference, but it is additive.

    If anyone has a large balance they are carrying for a long time, they should look into a home-equity or other bank loan to reduce the interest charges.

  4. Thanks for the added info JLP. It makes a lot more sense now.

    Another sneaky tactic my Discover card uses: They give a 1.5% APR on balance transfers for the life of the transfer, and encourage you to transfer a large amount. However, they then require you to make a $25.00 purchase every month, or you forfeit the rate.

    The kicker is, purchases have an APR of 10-15%, and their policy is to apply all your credit card payments to the *lower* interest rate balance first, so you have to pay off the 1.5% balance transfer before you can even start making a dent on the monthly 15% purchases, which sit there and additively compound! Sneaky sneaky.

  5. This information is not correct. You are assuming that Discover and the other issuers that use a two-cycle method (Chase, GE Capital, National City, and a few others) use a true two-cycle method, in which ADBs are always computed over two cycles, not just one. No one does this. What they actually do is to eliminate the grace period if you pay in full one month but revolve the next. In other words, with the exception of the first cycle, to get your grace period, you have to pay in full in two consecutive cycles. This really isn’t a true “two-cycle” method at all; it actually affects the grace period more than the balance calculation method. The disclosure ought to be that the balance computation method is single-cycle ADB and the grace period is provisional, but the Fed requires the disclosure to be two-cycle ADB with a regular grace period.

    To see how this really works, let’s say that you get your new card with a 12% APR for Purchases, and in Cycle One you make $1,000 in purchases on Day 15. You get your bill for Cycle One, and there will be no finance charges, because you get a provisional grace period. Now let’s say you send in a payment for $800 on Day 15 of Cycle Two. On your bill for Cycle Two, you will pay $11 in finance charges. You will pay $6 in finance charges for Cycle Two ($600 ADB — $1000 for 15 days and $200 for 15 days — at 1% per month) and the $5 in finance charges for Cycle One ($500 ADB — $0 for 15 days and $1000 for 15 days — at 1% per month) on which you were provisionally granted a grace period. From that point on, if you revolve every month and never pay in full, your finance charge will be exactly the same under two-cycle ADB (the way issuers now impose it) as under single-cycle ADB. If you pay in full and then revolve again, there will one month where you’ll have to pay the previous month’s finance charge on which you provisionally got a grace period.

    Hopefully that made sense.

  6. I have a question for all you credit card wizbangs out there …

    Recently, my husband and I received a very large sum of money and wish to pay off our two credit cards totaling $20K. The remaining funds will be carefully invested.

    While we do have a 2 year old mortgage of $240K, we have no other debt. We own both of our cars, our student loans were paid off several years ago, and we have both been very aggressive with our retirement planning as well.

    Our Chase card has a 3.99% rate until the balance of 11K is paid off, and our Citi card has a 8.99% rate on the 9K balance. To date, we’ve been paying $300-400 over the minimum every month on each card, but now, due to this recent blessing, wish to wipe it out in one big swoop.

    Is there an optimal time in the cycle to pay off these balances in full, and if so, will doing this have any effect on our high FICOs? On one site, I read that you should pay off a balance in full over a period of a few months rather than in one lump sum?

    Thanks for all of your great advice. We visit regularly.

  7. hey yeah i had a question. my gf got a new card and has a limit of 500 on it. she said she was going to keep all her reciepts and spend only 400 for a month. can you tell me how it would be on the statement.for instant like how much would it be for minium payment

  8. I experienced this first-hand with Discover some years ago when one month I thought I had paid off the card (after carrying a balance over a few months) and the next month I get a bill for the add’l interest. Needless to say I’ve not used the card since.

  9. Another sneaky, and more obvious, trick credit card companies use is the fine print. We all know that all of this info is burried in a small booklet that usually comes with your first bill.

    Americans on average read at an 8th grade level, According to a new study by the Fed. the credit card stipulations are written for a 12th grade level. This is more proof that the credit card companies want to slip in these “gotch’s” instead of disclose them.

  10. Dear Sir:
    Your 2nd August table from the top has an incorrect ave. daily balance. Your average amount is below the lowest balance for the month. It would seem to me that it should be the same ave. daily balance you computed in the top most August table = $987.10.

  11. Your entire example is wrong. In your August example… besides the obvious error of the AverageDailyBalance being lower than any single day balance… you’ve omitted a small (but significant) charge.

    Unknown to most people… credit card interest is compounded daily. On your statement… under “How we calculate…” it actually says this WITHOUT using the word COMPOUNDED. Incredibly clever!

    “Your daily balance is calculated by taking the previous day’s balance, adding any new charges and subtracting any payments posted.”

    Most people don’t realize that “…adding any new charges” is not limited to new purchases. The daily interest on yesterday’s balance is a “new charge”… and tomorrow, you’ll be charged interest on the interest added yesterday.

    Consequently… if on Day_1 you have a balance of X… on Day_2 your balance will be greater than X. Without any new purchases… until a payment is recorded… your balance will increase EVERY day.

    From your August example… with interest compounded daily…

    30830.12 – Sum of Daily Balances
    994.52 – Average Daily Balance
    15.20 – Interest added

    Without daily compounding…

    30600.00 – Sum of Daily Balances
    987.10 – Average Daily Balance
    15.09 – Interest added

    The significance of this comes into play when you time your payments to be close to their due date.

    With the ability to pay online… you can save a significant amount of money (and shorten the pay-down period).

    Make your payment on the first day after your closing date.

    If the timing is wrong and funds are not available to do this… request that your closing date be changed to a date that will allow you to take advantage of the strategy.

    Your savings won’t make you rich but… like my Mother said… “Better in your pocket than in their pocket.”

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