Credit cards have been around for decades but more and more of them are changing the way they calculate the interest. It used to be that if you left a balance on the credit card you would pay interest on that amount. Led by the Discover Card, two cycle billing has become more and more common. It makes you pay interest on money you already paid off last month.

Here is how it works: Start with a new credit card that has as its method of computing interest as two cycle billing and an interest rate of 9.9 percent. After charging $1,000 during the month, you pay it all off - maybe because you refinanced your home or balance transferred it to another card or just used your tax refund. The point is that the balance is now paid off. The next month you charge $1,500. The statement you receive after that has no interest charged and a balance of $1,500. So you pay it down to $500. That means you paid $1,000 last month and $1,000 this month.

"The interest rate on the old card could be 24 percent and you would still pay less with this card than the 9.9 percent one."

You decided to use this card because of the relatively low interest rate of 9.9 percent. Compared to that other card that you had which is 15 percent interest, this seemed like the better choice. However, if the higher interest rate card has the method of computing interest as, "Average Daily Balance, Excluding New Purchases," the interest you would pay would actually be lower. In fact, the interest rate on the old card could be 24 percent and you would still pay less with this card than the 9.9 percent one.

The two cycle billing method adds the charges made for the last two cycles or months together and that is what you pay interest on. So the 9.9 percent interest card actually is against a balance of $2,500, not $500. Just as the balance used to calculate the interest you owe for that month is five times the actual amount left on the card, so is the interest rate. In short, this month, your card has a 50 percent interest rate!

Here are a few cards that can have this method: Discover Card, Capital One, Providian, First USA, Starbucks Card, Radio Shack and Home Depot, just to name a few. Nearly all credit card companies have the ability to change their method of computing interest from a more friendly method to two cycle billing. There are many reasons that credit card companies use to make the switch.

Here are some of the most common reasons used by companies to change the method of computing interest:

• Late payment on your credit card
• Over-the-limit charges
• Late payment on any other debt
• For any other reason they want, with 30 day notice

How can we avoid, or at least limit, the amount of cards that we have that use the two cycle billing method? It goes without saying that paying off your credit cards each month is the best way to avoid being subject to any method of computing interest. If that is not possible, then begin by looking at the initial application for the card. You will not find it on the statement. If you don't have the application anymore, call the customer service number and ask what method they are using. If it is a two cycle billing method then stop charging on that card and begin a debt payoff program immediately.

Next, if you have to carry a balance from month to month for other purchases, use a card that has a method of computing that is "Average Daily Balance, Excluding New Purchases" or "Average Daily Balance, Including New Purchases." Keep an eye out for those automatic monthly charges on your card. They can trigger two cycle billing charges, even you paid off the balance, and you will not even know it.

If you pay off a two cycle card to zero then charge again and leave a balance, you could restart the two cycle billing method and pay even more interest. The most I have seen so far is over 200 percent effective APR.

Remember to pay off your cards each month, and if you can't then consider consolidation. Debt balances are more about habits and choices then ignorance. However, credit card companies can and some do take advantage of that ignorance to enrich themselves.


Arif M Halaby is president and CEO of Total Financial Solutions, Inc. He also hosts two radio shows a week on KHTS AM 1220 on Tuesdays and Thursdays from 1 p.m. to 2 p.m.