I thought I was pretty knowledgeable about credit cards and all, but in doing my due diligence for my Discover 0% For Life credit card offer, I learned something new to look out for – two-cycle billing. (Coincidentally, I wake up to the a comment mentioning it). I guess I never heard of this becuase I never carry a balance that isn’t at 0% APR. Also, most credit card companies don’t use it. Two biggies that do are BankOne (now Chase) and Discover. What is two-cycle billing?
Generally, this means that of your interest being calculated on the average daily balance for just one month, it is based on your balance over the previous two months. The exact math formula varies a bit by issuer, but here is an example of how it could work:
So, say you had a $1,000 bill in Month 1 and you pay off $800 if it, leaving $200. In Month 2, you don’t buy anything. Month 3 rolls around, and you expect to pay interest on… $200, right? Wrong. Due to the beauty of two-cycle billing, you are charged interest on the average, which would be $600. In essence, your grace period for everything went poof! Very sneaky.
How do you find out if this affect you? In credit card applications. look for the words “Method of Computing the Balance for Purchases” or similar in the boxes. If it says, “Two-cycle Average Daily Balance” instead of “Average Daily Balance”, watch out! Of course, if you pay off your bill in full every month, you won’t notice anything and your grace period stays intact.
As for 0% balance transfers, if you pay off your balance completely on time before interest starts to accrue, there should be no interest charges the next month after your payment.