Outstanding Balance financial definition for 2021
Outstanding balance definition. An outstanding balance is the amount you owe on any debt that charges interest, like a credit card. Most often, it refers to the amount you owe from purchases and other transactions made with your credit card. It’s also called your current balance.
Friends, Outstanding balance is the total unpaid amount on your credit card. Read on to learn how it differs from other balances, and how much you should pay.
Understanding your credit card statement can be a bit of a balancing act. Indeed, the statement lists several balances. This can include what is called an unpaid balance.
So what is an outstanding balance and how is it different from other balances that show up on your credit card statement? Continue to improve your knowledge of credit card balances.
It includes any finance charges and late fees. Credit limit: The amount of credit you can use to make your purchases. Previous statement balance: What you owed on the day your previous statement was prepared. Outstanding Balances: The amount you owe the Bank on purchases made with your credit card.
Pay your statement balance in full to avoid interest charges. But in order to avoid interest charges, you’ll need to pay your statement balance in full. If you pay less than the statement balance, your account will still be in good standing, but you will incur interest charges.
What does it mean to have an outstanding balance?
Outstanding balance, also known as current balance, refers to the total unpaid amount on your credit card. This includes purchases, balance transfers, cash advance, interest charges, and fees. … that’s because the statement lists more than one balance. This might include what’s known as an outstanding balance.
- The average outstanding balance refers to the unpaid portion of any term, installment, revolving, or credit card debt on which interest is charged.
- Interest on revolving loans may be assessed based on an average balance method.
- Outstanding balances are reported by credit card companies to consumer credit bureaus each month for use in credit scoring and credit underwriting.
Average outstanding balances can be important for a few reasons. Mainly, an average outstanding balance method may be used to assess interest on debt. The type of methodology used can affect how much a borrower pays in interest.
The basic formula for calculating an outstanding balance is to take the original balance and subtract payments made. To calculate your monthly interest rate, divide your annual interest rate by the number of payments you make each year. For example, if your loan has a 5 percent interest rate and you make payments once a month, your interest rate is 5 percent divided by 12, or 0.4 percent.
For example, your list might read:
- Original loan balance = $600,000.
- Monthly payment amount = $500.
- Interest rate each month = 0.4 percent.
Create the Amortization Table
- Create five columns for your amortization table. Label them Payment number, Payment amount, Interest payment, Principal payment, and Outstanding balance.
- Directly below the Payment number, write the number 0 in the first row
- Directly below Outstanding balance, write the original loan balance in the first row. In this example, it would be $600,000.
Record the First Payment
- In the Payment number column, write the number 1 in the row below Payment 0.
- In the same row of the Payment amount column, write your monthly payment amount. In this example, it would be $500.
- In the same row of the Interest payment column, multiply the interest rate by the outstanding balance before this payment to determine the interest portion of the payment. In this example, it would be the previous balance of $600,000 multiplied by 0.0004, or $240.
- Subtract the interest payment amount from the total payment amount to find the Principal payment for this row. In this example, it’s $500 minus $240, or $260.
- In the same row of the Outstanding balance column, subtract the principal repayment from the previous balance to calculate the new outstanding balance. In this example, the new outstanding balance would be $600,000 minus $260, or $599,740.
Record Subsequent Payments and Find Outstanding Balances on the Loan
- In the Payment number column, continue labeling payment numbers for as many payments as you’ve made. For example, if you’re two years into your loan and you make payments once a month, you’ve made 24 payments.
- Repeat the process you performed for the first payment for each subsequent payment you’ve made. The figure listed in the Outstanding balance column in the row of your most recent payment is the current outstanding balance on the loan.
What is an outstanding balance on a credit card?
The outstanding balance, also known as the current balance, refers to the total amount owed on your credit card. This includes purchases, balance transfers, cash advances, interest charges, and fees. The outstanding balance serves as a real-time snapshot of your credit card account.
The outstanding balances change every time you use your credit card, even minute to minute. For example, if you charge a $ 75 dinner on your credit card, that $ 75 purchase will be part of the outstanding balance once the transaction is posted to your account.
The outstanding balance helps determine how much credit you have at any given time. To calculate your available credit, subtract the outstanding balance from your credit limit and add any outstanding charges that are not yet in your account.
So let’s say your outstanding balance is $ 1,500 and your credit limit is $ 5,000, and a pending transaction of $ 200 is not yet on your account. At that time, your available credit is $ 3,300 ($ 5,000 subtracted from $ 1,500 and $ 200 = $ 3,300).
Where do you find the outstanding balances on your account? You can find this information by logging into your account online or through a mobile app, or by contacting the company that issued the credit card (such as American Express, Capital One, Chase, or Citibank).
Interest on average outstanding balances
Many credit card companies use an average daily outstanding balance method to calculate the interest charged on a revolving credit loan, especially credit cards.
Credit card users accumulate overdue balances when making purchases throughout the month.
An average daily balance method allows a credit card company to charge slightly higher interest that takes into account the cardholder’s balances in the last days of a period and not just on the closing date.
With the average daily calculation of the outstanding balance, the creditor can take an average of the balances from the last 30 days and assess the interest on a daily basis.
Typically, average daily balance interest is the product of the average daily balances over a statement cycle, with interest being assessed on a cumulative daily basis at the end of the period.
Either way, the daily periodic rate is the Annual Percentage Rate (APR) divided by 365. If interest is assessed cumulatively at the end of a cycle, it would only be assessed based on the number. days of this cycle.
Other average methodologies also exist. For example, a simple average can be used between a start date and an end date by dividing the opening balance plus the ending balance by two, then valuing the interest against a monthly rate.
Credit cards will provide their methodology of interest in the cardholder’s agreement. Some companies may provide details on the calculation of interest and average balances in their monthly statements.
How much of your outstanding balance do you have to pay?
You look at your credit card bill and wonder how much of your outstanding balance needs to be paid. The decision depends on your financial situation at the time.
The statement balance often exceeds the minimum amount due that appears on a monthly statement. Let’s say the statement balance is $ 2,000, but the minimum payment due is $ 50. At the very least, you should make the minimum payment of $ 50 before the due date.
But if you want to avoid paying interest, you have to pay the entire $ 2,000 statement balance. Paying the full statement balance is a smart way to avoid interest charges.
Now you don’t have to pay the outstanding balance to avoid interest and fees. The payment of the balance of the statement will take care of this.
But if you pay off the entire outstanding balance, you can lower your credit utilization rate. This ratio refers to the amount of money you owe on all of your credit cards divided by the total credit card limits on your cards.
Here is an example of how the credit utilization ratio works. You owe a total of $ 2,500 on your three credit cards. The total credit limit for the three cards is $ 10,000. This means that you are using 25% of your available credit, which gives you a 25% credit utilization rate.
Why is the credit utilization ratio important? It typically represents 30% of your credit score. Some experts recommend keeping your credit utilization rate below 30%. But others suggest lower amounts, like 25% or even 10%.
Tip: FICO’s credit scoring model takes into account your overall credit usage and the debt-to-limit ratios of your individual cards. But the first one carries more weight when it comes to your credit score.
Outstanding balances are reported by credit grantors to the credit reporting agencies each month. Credit issuers typically report the borrower’s total outstanding balance at the time the report is provided.
Some credit issuers may report outstanding balances at the time a statement is issued, while others choose to report data on a specific day each month.
Balances are reported for all types of revolving and non-revolving debt. Along with overdue balances, credit issuers also report overdue payments starting 60 days late.
The speed of payments and overdue balances are the main factors that affect a borrower’s credit rating. Experts say borrowers should strive to keep their total outstanding balances below 30%.
Borrowers using more than 30% of the total outstanding debt available can easily improve their credit score month-to-month by making larger payments that reduce their total outstanding balance.
When the total outstanding balance decreases, the borrower’s credit rating improves. Speed, however, is not as easy to improve since overdue payments are a factor that can stay on a credit report for seven years. Average balances in general are not necessarily part of credit scoring methodologies.
However, if a borrower’s balances change drastically over a short period of time due to debt repayment or debt build-up, there will usually be a lag in reporting the total outstanding balance to the credit bureau. , which can make it difficult to track and evaluate outstanding balances in real-time.
High balances on your credit cards can eat away at both your credit utilization ratio and your payment history. This, in turn, might make it harder to qualify for credit or could stick you with higher interest rates if you are able to obtain new credit.
An average outstanding balance is the outstanding, interest-bearing balance of a loan or portfolio of loans, averaged over a period of time, typically one month. The average outstanding balance can refer to any term, due, revolving, or credit card debt on which interest is charged. It can also be an average measure of a borrower’s total outstanding balance over a period of time.
The average outstanding balances can be compared to the average received balance, that is, the part of the loan that was repaid during the same period. Since the outstanding balance is an average, the time period over which the average is calculated will affect the amount of the balance.