Top 5 Credit Card Sleights of Hand
If you’ve ever felt like you’d have to go to law school to learn how to read the fine print on credit card agreements, you’re not alone. Most consumers simply ignore the credit card Terms and Conditions, sign on the dotted line, and swipe away happily ever after.
Unfortunately, when it comes to credit cards, what you don’t know will cost you. There are a lot of fine points hidden in those credit card terms and conditions, and it can literally cost you thousands of dollars not knowing about them. Here is CreditCardGuide.com’s guide to the top 5 credit card sleights of hand and how to avoid being taken to the cleaners by your credit card company.
The #1 Credit Card Sleight of Hand: Double-Cycle Billing
By Eva Norlyk Herriott
Knowing how much you’ll pay in interest charges on outstanding credit card balances would seem to be as simple as knowing what the annual percentage rate (APR) on the card is. Unfortunately, this is not the case. It’s not just important what the interest rate is, it’s equally important how the interest charges are computed.
When card issuers calculate interest charges each month, they calculate the average daily balance for that billing cycle by adding up the balance owed each day in the billing cycle and then dividing it by the number of days in that cycle. Most credit card companies charge interest based on single-cycle billing, in which the interest simply is charged on the average balance throughout the past billing cycle.
Double-cycle billing is a nifty sleight of hand, which enables credit card issuers to charge higher interest fees by computing interest on the average outstanding credit card balance over two billing cycles instead of one. In double-cycle billing, card issuers consider not just the average daily balance on the credit card for the current billing period, but also for the previous billing period.
If this sounds confusing, it’s because it is. To see how it works in practice, let’s take an example. Let’s say that you use the credit card for a renovation project and charge $5,000 to the card in one month. You pay down the balance by $4,000 the first month and leave the last $1,000 for the next month.
For a card with single-cycle billing, interest would be charged only on the $1,000 balance carried forward. For a card with double-cycle billing, however, interest would be computed on the basis of the average daily balances of $5,000 and $1,000 over two months, or roughly $3,000. The effect is that you’re paying now paying interest on a $3,000 balance instead of a $1,000 balance, three times as much in interest as you had counted on.
People who carry a revolving balance on their credit card are not affected as much by double-cycle billing, because their balance stays pretty steady. However, for people who only carry a balance sometimes, double-cycle billing can be expensive.
Fortunately, double-cycle billing is likely to be eliminated as law makers take steps to introduce credit card reform over the next year. Until then, here are three steps to avoid the bite of double-cycle billing:
1. Find out if your card issuer applies double cycle billing. Look at the back of your credit card statement under the section labeled “Finance Charges.” Here card issuers state how finance charges are calculated. Make a list of all your credit cards, so that you know which ones have double-cycle billing and which have single-cycle billing.
2. For credit cards with double-cycle billing, as much as possible, pay the balance off in full every month. If you have to carry a balance forward on a card with double-cycle billing, keep the balance on the card roughly the same from month to month.
3. Avoid using a card with double-cycle billing to take out a short-term credit card loan. If you only have one credit card and it has double-cycle billing, consider looking for a better credit card deal.
