it does not take into account the average daily balance, i.e. the time value of money actually lent by the bank. It does, however, take into account money that is left lent out over several months. Previous balance The reverse happens: the balance at the start of the previous billing cycle is multiplied by the interest factor in order to derive the charge. As with the Adjusted Balance method, this method can result in an interest rate higher or lower than the expected one, but the part of the balance that carries over more than two full cycles is charged at the expected rate. Two-cycle average daily balance The sum of the daily balances of the previous two cycles is used, but interest is charged on that amount only over the current cycle. This can result in an actual interest charge that applies the advertised rate to an amount that does not represent the actual amount of money borrowed over time, much different that the expected interest charge. The interest charged on the actual money borrowed over time can vary radically from month-to-month (rather than the APR remaining steady). For example, a cardholder with an average daily balance for the June, July, and August cycles of $100, 1000, 100, will have interest calculated on 550 for July, which is only 55% of the expected interest on 1000, and will have interest calculated on 550 again in August, which is 550% higher than the expected interest on the money actually borrowed over that month, which is 100. However, when analyzed, the interest on the balance that stays borrowed over the whole time period ($100 in this case) actually does approximate the expected interest rate, just like the other methods, so the variability is only on the balance that varies month-to-month. Therefore, the key to keeping the interest rate stable and close to the "expected rate" (as given by average daily balance method) is to keep the balance close to the same every month. The strategic consumer who has this type of account either pays it all off each month, or makes most charges towards the end of the cycle and payments at the beginning of the cycle to avoid paying too much interest above the expected interest given the interest rate; whereas business cardholders have more sophisticated ways of analyzing and using this type of account for peak cash-flow needs, and