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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.
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:
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:
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:
That $15.09 gets added to your balance so you start the month of September off by owing $915.09.
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:
The month of August would look like this:
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
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
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.