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In recent years, many credit card companies have resorted to questionable tactics in order to squeeze more money out of consumers. Some have even adopted a new way of charging interest for their credit cards – it’s called 2 cycle billing and there is still some confusion as to how it works. Consumer confusion is almost never a good idea, so we’ll effectively explain just how 2 cycle billing works here. As you know, with normal billing cycles, you are charged interest for your balance at the end of the cycle, giving you a grace period to pay off any debt you’ve incurred. Now in 2 cycle billing, you are charged interest for your average daily balance during your current and previous cycles, which is usually about the last 60 days. Here’s an easy to understand example:
How 2 Cycle Billing Works
- Let’s say you open a new credit card, but don’t use it for the first several months, assuming there are no fees or charges, you’ll continue to have a $0 balance. Then a couple days into a new billing cycle, you make a $100 purchase on the credit card.
- You’re well aware that you shouldn’t carry a high balance, so you pay off all $100 of debt on your credit card near the end of your billing cycle.
- Although your debt has been paid off before the end of the billing cycle, that $100 purchase will affect your average daily balance over the last two billing cycles. Fortunately, you did not carry a balance on your previous billing cycle and your average daily balance over two billing cycles should be fairly low.
- Depending on your interest rate, you’ll have some new debt from finance charges on your credit card when the new billing cycle begins. For this example, let’s say you pay those finance charges off immediately, leaving you with a $0 balance for the rest of the month.
- With a $0 balance for nearly all of the month, you might expect to be almost completely free of finance charges at the end of the billing cycle. That won’t be the case with 2 cycle billing, where your finance charges are based off of your average daily balance for the last two billing cycles.
- Remember that $100 balance you carried for most of last month? That will have an affect on your average daily balance for the last two cycles, meaning you’ll still have some finance charges when that next billing cycle rolls around.
Should I avoid 2 Cycle Billing?
Although 2 cycle billing has the potential to cost you more money, it really depends on your credit card habits. If you tend to keep a fairly stable balance on your credit card from month to month, you probably won’t see much of a difference in 2 cycle billing. However, if you tend to carry a balance once in a while, you will most likely end up paying more with 2 cycle billing since you can be charged interest even if you currently have a $0 balance.
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