January 23, 2009
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News: No Double-Dipping.
Congress is putting forth a bill right now that will provide stronger protections for credit card consumers. Called "The Credit Card Holders' Bill of Rights", this bill directly addresses ‘unfair and deceptive practices' by our nation's credit card industry. One of the issues being addressed is this practice called ‘Two-Cycle Billing'.
So, what is this double-dipping scheme called ‘Two-Cycle Billing' in the industry and how does it hurt the credit card consumer? To answer this question, it might be helpful to cover the techniques commonly used in the credit card industry and then to show the aberrations from that method. Even though the APR is mostly referred to, ‘DPR' (daily percentage rate) is almost always used. Most typically, payments are applied first, followed by charges on each day. Then the DPR is multiplied by that ADB (average daily balance). Tomorrow that DFC (daily finance charge will be added to your principle (so, you owe a little more money with each passing day).
Now say, you've been relaxin' in the sun with your 0% APR promo that expires next month (as you believe). You haven't noticed that the monthly cycle actually advances a month because the first day of the new month is included in your last month's statement. You've been making the minimum $20 payments on your 0.0% APR $5,000 credit card loan for so long that it's become routine. When comes the time, you're on top of it and planning to pay the balance down to only $500. You realize your ‘cycle-month' disparity when your next statement comes and you see a whopping finance charge of $75.54. Ouch, that hurts. So you quickly gather your wits and pay the balance down to only $500 on the second day of the new cycle (as you had planned, albeit, being off by a billing cycle). The month goes by and you anticipate a new finance charge of $10.94. When the statement arrives, you find a finance charge of $43.23! What happened? The credit lender already planned to get its profit by switching its method of calculations to the ‘Two-Cycle' method and averaged in your last ‘unlucky month' in with this one. So, there ya have it.