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2-cycle average daily method of computing balances and its implications

If you carry a monthly balance on your credit card, chances are that have looked for a low interest credit card, preferably one that offers a 0% introductory APR for a certain time period. One of the factors commonly overlooked is how the credit card calculates your monthly balance.

The most common method used by most credit card issuers is the average daily balance method (including new purchases). However, some credit card use the 2-cycle average daily balance method (which essentially takes the average of the present and last balance that you have incurred). This articles examines the implications of credit cards using the 2-cycle average daily balance method of computing balances.

The table below illustrates the finance charges incurred when we use both the average daily balance method and the 2-cycle method. We assume an APR of 15% and current monthly balance of $500. Because the 2-cycle method takes the average of the present and previous cycle balances, we also compute the finance charges under 3 scenarios - 1) constant balance ($500), 2) Lower balance the previous month ($200) and 3) a higher balance the previous month ($800).

	Average Daily Balance	2-cycle Average Daily Balance
APR	15%	15%	15%	15%
Monthly APR = APR/12	1.25%	1.25%	1.25%	1.25%
Previous Balance	$500	$500	$200	$800
Current Balance	$500	$500	$500	$500
Computed Balance	$500	$500	$350	$650
Finance Charges	1.25% x $500 = $6.25	1.25% x $500 = $6.25	1.25% x $350 = $4.375	1.25% x $650 = $8.125

We can conclude a few points from the table above. Firstly, if the balance you carry every month is quite constant, the method of calculating balance (either the standard average daily balance or the 2-cycle average daily balance method) should not matter to you. However, if you are reducing your balance every month, then the 2-cycle average daily balance method will result in higher computed monthly balance and hence higher interest charges (everything else being equal). If your balance is increasing every month, then your computed balance will be lower than your current actual balance. (though no financial advisor will recommend that you carry credit card debts, not to mention increasing them).

If your goal is to reduce your monthly balance (and eventually credit card debt), and if you are thinking of switching to a credit card with a lower APR than your present one, you should avoid credit cards that use the 2-cycle average daily balance method of computing your balance.

Even if you carry a constant balance every month, it is still better to have a credit card that uses the standard average daily balance method of computing balance. This is because over time, you would assume that you would want to gradually reduce your credit card debt.

Bottom line is : if you carry a balance, it is best that your credit card uses the standard average daily balance method of computing balance and not the 2-cycle method.

There are other important factors to consider when you are looking for a credit card with a lower APR than your present card, especially if you are looking to transfer your balance. I have written an article on this topic which you can acess at the following url :

http://www.compare-apply-credit-card-online.com/balance-transfer.html

Owner of website http://www.compare-apply-credit-card-online.com A website that provides independent and unbiased credit card reviews, tips, articles and recommendations

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