Two Cycle Average Daily Balance: Avoid it!
During the course of our research into the best credit cards available, we have come across some stinkers, as you might imagine. The new holder of the crown for lousy deals is any credit card which bears the appellation "two cycle average daily balance". Why is this term now on our D-list? Here's why:
As we explained in our not so secret secret to debt reduction, the average daily balance computation works in your favor if you make multiple payments each month. This is a good thing, as it helps you reduce your debt faster.
Two-cycle average daily balance is the credit card's solution to this problem. How it works is simple: instead of computing your average daily balance for the current billing cycle, it computes the average daily balance for the current and previous billing cycle.
What does this mean for you?
You pay more.
Why? Because your extra payments to reduce your balance won't have any effect on the previous billing cycle. Let's take an example. Say you have a starting balance of $1,000 on a credit card with 15% APR. If you do nothing all month and pay $100 at the end of the month, your finance charge will be computed as such:
(APR * days in billing cycle * ADB) / days in year = interest
(.15 * 30 * 1000) / 365 = $12.74 interest
So far, so good. But let's say that you had a starting balance of $1,500 the previous month, and a starting balance of $1,000 this month. Your two-cycle average daily balance would be $1,250. If your credit card uses two cycle average daily balance, you will now pay:
(APR * days in billing cycle * TCADB) / days in year = interest
(.15 * 30 * 1250) / 365 = $15.41 interest
You don't need to be Alan Greenspan to figure out that you are getting hammered, absolutely trashed, on interest if you have a credit card which uses two-cycle average daily balance as its method of computing interest. The worst part is, even if you make great strides in paying down your debt this month, you are still getting charged more for last month's debts!
Our recommendation? If you have a credit card with two-cycle average daily balance, pay it off, close the account, destroy the card, and never, ever look back. Two-cycle average daily balance will do nothing good for your finances. Beware! Check your disclosure statement to verify. It is required by law to disclose how your interest is computed.
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