WHAT IS Double-Cycle Billing

Double-cycle billing is a method used by creditors, usually credit card companies, to calculate the amount of interest charged for a given billing period. It takes into account not only the average daily balance of the current billing cycle (usually one month), but also the average daily balance of the previous cycle. Double-cycle billing can add a significant amount of interest charges to customers whose average balance varies greatly from month to month. The Credit CARD Act of 2009 banned double-cycle billing on credit cards.

BREAKING DOWN Double-Cycle Billing

Double-cycle billing, also known as "two-cycle average daily balance,” had long been used by some credit card companies to increase the amount of interest charged to customers. Many customers were unaware of how this billing method bumped their interest bill. The practice came to attention in 2006 during a United States Senate report on credit cards.

Double-Cycle vs. Average Daily Balance

Today virtually all U.S. credit cards calculate interest using what’s called average daily balance, which means the average balance over the one-month charge cycle. If you had a balance of $1,000 the entire month, the calculation would be $1,000 x 31/31 days = $1,000 average daily balance. But if you had a balance of $1,000 the first 15 days and $1,500 for the rest of the month, the calculation changes to $1,000 x 15 + $1,500 x 16/31 days = $1,258.06 average daily balance. Since we’re still just calculating interest on the current month’s charges, this is considered fair.

Under double-cycle billing, the average daily balance of the current billing month is only half the picture; you also need to factor in your balance from the previous month. Say you carried a balance of $2,000 in the previous month, and a balance of just $1,000 in the current month. In other words, you paid off half of your balance from last month. But under the double-cycle billing method, your average daily balance would be $1,500, which is the sum of both months’ average divided by two. Effectively you would be paying interest on debt that you already paid off.

Before double-cycle billing was banned, consumers had three options to avoid the practice. They could shop for credit cards that didn’t use double-cycle billing; they could try to maintain a consistent balance from one month to the next; or they could pay off their balance in full every month and pay no interest at all, which is always the best practice.