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(National) Feb. 23, 2005 - Ira Stoller rarely carries a balance on his credit cards, "I can't stand the idea of renting money."
He fell short one month, "Therefore I was hit with a finance charge." The charge was much more than he expected, "It startled me. I called, I complained, I yelled - to no avail."
Ira's credit card company uses something called two-cycle billing. Gerri Detweiler is the author of the Ultimate Credit Handbook, "Credit card interest is tough to understand no matter what type it is. And, two-cycle is even more confusing."
The bottom line is instead of your interest being calculated on the average daily balance for one month, it's based on your balance over the previous two months. Detweiler says it basically wipes out your grace period, "Certainly for the credit card companies, it adds up to really big bucks."
Let's say you've been paying your bills in full and charged a $1000 computer mid-December, but you could not make a payment when your January statement arrived. Detweiler says come February, "Most issuers, under the average daily balance method, are going to charge you interest for your outstanding balance in January. So, that's $1000 at 18% interest, you'd pay $15 in interest."
But, with two-cycle billing, you'll pay the $15 interest for January and finance charges based on your average daily balance in December. Detweiler says that's an extra $7.50, bringing your interest penalty up to $22.50, "It may seem like a few dollars here and there but, in the end, it can add up to a lot of money."
Linda Sherry is with Consumer Action. The group's most recent survey found two-cycle billing on dozens of cards from big issuers like Bank One, its subsidiary First USA and Discover, "It did surprise us to even find that banks of this magnitude were actually using it."
It doesn't have to be a surprise to you. Experts say two-cycle billing is always spelled out in the fine print of your terms and conditions.
Ira says he's sticking with his card despite the two-cycle billing, because it offers some other perks, "The rebates far outweigh the costs of the finance charges that may happen every so often. I'm still ahead. I win."
How do credit card issuers defend two-cycle billing? Bank One says, "Most of our card portfolio has two-cycle billing." The company goes on to say, "If a card member does not pay off a balance within the grace period, he or she has borrowed money from the bank and the two-cycle billing allows interest to be collected for monies that have been borrowed." The Discover credit card company did not return phone calls.