More and more cards are switching to average daily balance calculations but there are still quite a few cards out there that may be using the dated dual-cycle interest calculation which means if you carry any type of balance on your card it could prove costly. So, what is the difference in these calculations and how much would it really affect you?
Dual-Cycle: With this method the credit card issuer will take a look at what your previous month as well as the current month’s purchases were to calculate the average daily balance.
Average Daily Balance: This method is better for consumers because each day in the billing cycle that you carry a balance is added (less any credits) and at the end of the period a true average is determined based on the number of days in that cycle.
Why This Matters
The problem with the dual-cycle balance is that you may end up paying a significant amount of interest compared to your actual current balance. For example, let’s say in May you had a $1,000 balance and you made a $990 payment. This leaves you with a $10 balance in the month of June. Even though your June balance is only $10 if your card used the dual-cycle method you would be assessed a finance charge reflecting the balance before the payment was made, or in other words on $1,000.
To illustrate this point we can assume your credit card has an APR of 15%. This means your periodic rate would be 1.25% per month (15/12=1.25). So with the dual-cycle calculation your June statement would assess a finance charge of $12.50 ($1,000 x 1.25% = $12.50), which is even more than your outstanding balance! On the other hand the average daily balance method would only base the amount on the number of days in that billing cycle that you carried that $10 balance, so in other words the periodic rate would be multiplied by $10, or a finance charge of $0.125.
Check Your Cards
More than likely your cards are using the more beneficial method of average daily balance but as you can see it can really pay to check and be sure. For people who pay their balance in full this won’t really matter. It also won’t affect people who only pay the minimum amount every month quite as much since the balance stays relatively constant, but it can still be a small savings.
Where this really comes into play is for those who generally pay off a large portion of the balance each month but may not pay it off entirely, leaving a small carryover balance that could create excessive finance charges with the dual-cycle method. And also keep in mind that in the example above I used a relatively low balance amount with a fairly average APR. When you are talking larger balances and higher rates the difference can become quite significant.
Author: Jeremy Vohwinkle
My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.
Most of the time there will be a monthly statement charge and a per transaction fee. Some companies charge a startup fee while others do not. If you are looking for a service that includes a credit card processing terminal, be wary of so-called free offers.
Nice article ,so informative. Thanks
I'm not sure if this applies in the UK or not, sorry. And you don't hear about the other method very often simply because they don't want consumers to know. Fortunately a lot of finance sites over the past couple years have brought this method to public attention and a lot of companies have changed to the better ADB method.
So this shouldn't apply to very many people today, this can come into play when you get into some of the rewards, cash back or 0% cards which could make the deal not quite as good as it appears if you don't pay off the balance properly.
Why isn't this information more readily available by the credit card companies? I've never heard of the Dual-Cycle or Average Daily Balance Calculation before. Will have to look online to find out which my credit card is as I never pay of the balance just a percentage. Does this also apply to credit cards in the UK?
Well, if you always pay in full - why would anybody want to pay more than prevailing-CD-rate-adjusted-for-taxes on their money?- you couldn't really care less.
The only exception are 0% offers. I am not clear how it will affect it though. Say you had an X amount at 0% which expires on 07/01 (for example). So on 06/25 you sent a check for the full balance amount. With dual-cycle calculation, can they still charge interest on this balance next month?
I was not even aware of dual cycle and have not encountered it, thanks. Its good to know what to look out for!
That's correct. For the sake of simplicity in the example I just used an existing balance from the start of a month with an immediate payment rather than placing a purchase and then subsequent payment within the same cycle.
But in your example, if you assume a 31 day billing cycle that ends at the end of the month you would essentially have 15 days with a $0 balance, 15 days with a $1,000 balance and one day with a $10 balance, for 31 total days.
The average daily balance would be: $15,000 + $10 / 31 = $484.19, and after applying the periodic rate you have a finance charge of about $6.
But if you left that $10 balance carry over into the next cycle and made no additional purchases in June you finance charge would be 13 cents. But with the same activity on a dual-cycle system they would also go back and look at the previous statement balance, which could be something much larger than $10 depending on when payments were sent, etc.
So thanks for clarifying, it does become more complicated when you factor in when payments were made, if there were additional purchases and when they were made, and it is also worth noting that some companies will treat new purchases differently. Some may include them and others may not.
This was more or less the optimal example to show how much of an impact it can make, but real world examples will vary greatly.
With average daily balance, if you had nothing on the card and in May 15 spent $1000, then at the end of the billing cycle you paid $990 leaving you with a balance of $10, you would be charged interest on the balance each day in May divided by the number of days in the billing cycle.