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Double Billing Cycle Finance Charges Revealed

How Creditors Charge Interest on Paid Balances

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One of the ways creditors compute finance charges is the double billing cycle method. This is one of the most costly ways your finance charge can be calculated.

How it Works

To calculate your finance charge, the creditor uses your average daily balance for the current and previous billing cycles.

Let’s assume you have a balance of $500 with an APR of 11.9%. If you make a $200 payment at the end of the month, using the average daily balance method, your finance charge would be calculated like this:

(Average Daily Balance * APR * Days In Billing Cycle) / Days In Year
$500 * .119 * 25 / 365 = $4.08
 

The double billing cycle, or two-cycle average daily balance, method of calculating finance charges will also consider your previous month’s balance. If your previous month’s starting balance was $1,000, your two-cycle average daily balance would be $750. Your finance charge under this method is:

(Two-Cycle Average Daily Balance * APR * Days In Billing Cycle) / Days In Year
$750 * .119 * 25 / 365 = $6.11
 

The Effect

If you only carry a balance sometimes, you pay much more in interest if your credit card uses the double billing cycle method of calculating finance charges. This way you pay more interest and take more time to pay off your balance.

Cardholders with revolving balances aren’t affected as much by the double billing cycle as long as their balance doesn’t significantly increase or decrease from one month to the next.

What You Can Do

To find out if your creditor uses the double billing cycle method, read the back of your credit card statement. Look for a section labeled “Finance Charges.” There you can read how your finance charge is calculated.

You may not be affected by the double billing cycle method if your credit card balance doesn’t change much from one month to the next. However, if your balance fluctuates significantly, you would be better served with a credit card that uses the average daily balance method.

If the double billing cycle method is costing you, pay off the balance and stop using or close the credit card.

After February 22, 2010, new credit card rules will go into effect prohibiting credit card issuers from using the double billing cycle method of calculating finance charges.

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