Think You’re Not Using Two-Cycle Billing? You Just Might Be.

    Many financial institutions use what is referred to as “two-cycle billing” to compute finance charges. Regrettably, two-cycle billing has suffered repudiation and ultimate banishment as a result of unfortunate labeling – labeling that suggests creditors somehow charge twice or “double-dip” for finance charges – a classic case of perception being everything.

    So what is two-cycle billing? And, do you use it? If you offer a grace period – a period within which the cardholder may pay any portion of the credit extended without incurring a finance charge – you probably do. Why? Because two-cycle billing arises from operation of a commonly-offered grace period: You refrain from assessing finance charges until you know whether the cardholder will pay the account balance in full by its due date. If the cardholder pays in full, you honor the grace period. Otherwise, you assess finance charges from the transaction date. You don’t charge cardholders twice, but you do capture finance charges from the preceding cycle that you refrained from assessing in the first place.

    The new rules on credit card practices (Regulation AA) and amended Regulation Z prohibit two-cycle billing in the following way: Financial institutions may not assess finance charges based on balances for days in billing cycles that precede the most recent billing cycle as a result of the loss of a grace period. 74 Fed. Reg. 5498 (Jan. 29, 2009); 12 C.F.R. Parts 226, 227 (eff. July 1, 2010). (Hear another nail being hammered into the coffin of “deferred interest” plans? See our Alert, “Deferred Interest – Dead or Alive?” (Mar. 3, 2009).) The ban on two-cycle billing affects the date finance charges begin to accrue, the grace period and the balance computation method – all required disclosures under Regulation Z. But more importantly, the ban reduces finance charges.

    So, if you’re using two-cycle billing, must you change your practice? Yes and no. You could continue to offer your grace period, limited as required by the new rules, but you would capture fewer finance charges than you do now. Alternatively, you could offer a “true” grace period, or eliminate the grace period altogether, but neither is required nor attractive for various reasons. So what can you do? You can explore other alternatives.

    Through creative planning – including, once again, fair dealing and full disclosure – we believe that even though you cannot continue two-cycle billing, you can continue to capture the same finance charges while offering the same benefit to your cardholders.

    • Judy Scheiderer and Margaret Stolar