09.28.07 | Two cycle average daily balance card? Run far away!
There are certain features of credit cards which may provide card companies with additional revenue, but are major pains for those who succumb to problems they create. One of these is a method sometimes used to calculate interest which is called the two cycle average daily balance practice.
What does this long name mean? It’s actually very simple. Say you have a card with a $1000 balance and 15% APR. Your interest for the month is simple - $150/12 = $12.50. Easy. With the two cycle average daily balance, it takes into consideration what your balance was the prior month as well. If that number was higher, this process averages the two balances and you’ll end up having more interest tacked on to your bill. Not fun.
It is possible that this process can work to your advantage. If your balances were reversed ($1000 the first month and $1500 the second), you’d actually be paying interest on $1250 instead of $1500, which isn’t bad.
Regardless, this is a somewhat complex way of generating interest on card balances, which need to be watched very closely in order to avoid paying unnecessary. In order to simplify your life and interest calculations, just avoid cards with this feature!
