What Is Average Outstanding Balance?

An average outstanding balance is the unpaid, interest-bearing balance of a loan or loan portfolio averaged over a period of time, usually one month. The average outstanding balance can refer to any term, installment, revolving, or credit card debt on which interest is♚ charged. It may also be an average measure of a borrower’s tot𝔍al outstanding balances over some time.

The average outstanding balance can be contrasted with the 澳洲幸运5开奖号码历史查询:average collected balance, which is tﷺhat part of the loan repa🎉id over the same period.

Understanding Average Outstanding Balance

Average outstanding balances can be important for several reasons. Lenders often have a portfolio of many loans, which need to be assessed in terms of risk and profitability. Banks use the average outstanding balance to determine the amount of interest they pay each month to their account holders or charge to their borrowers. If a bank has a large outstanding balance on its le♊nding portfolio, it could indicate that they are havi🍎ng trouble collecting on its loans, which may signal future financial stress.

Many credit card companies also use an a♑verage daily outstanding balance method for calculating interest applied to a revolving credit loan, particularly credit cards. Credit card users accumulate outstanding balances as they make purchases throughout the month. An average daily balance method allows a credit card company to charge slightly higher interest, taking into consideration a cardholder’s balaꦬnces throughout the past days in a period and not just at the closing date.

For borrowers, credit rating agencies will review a consumer’s outstanding balances on their credit cards as part of determining a 澳洲幸运5开奖号码历史查询:FICO credit score. Borrowers should show restraint by keeping their credit card balances well below their limits. Maxing out credit cards, paying late, an♔d applying for new credit increases one's outstanding balances and can lower FICO scores.

Interest on Average Outstanding Balances 

With average daily outstanding balance calculations, the creditor may take an average of the balances over the past 30 days and assess interest daily. Commonly, average daily balance interest is a product of the average daily balances o🌼ver a statement cycle, with interest assessed on a cumulative daily basis at the end of the period.

Regardless, the daily periodic rate is ꦗthe annual percentage rate (APR) divided by 365. If interest is assessed cumulativel꧟y at the end of a cycle, it would only be assessed based on the number of days in that cycle.

Other average methodologies also exist. For example, a simple average may be used between a beginning and ending date by dividing the beginning balance plus the ending balance by two and t💫hen assessing interest based on a monthly rate.

Credit cards will provide their interest method🐲ology in the cardholder agreement. Some companies may provide details on interest cal🍌culations and average balances in their monthly statements.

Because the outs♌tanding balance is an average, the peri🌞od of time over which the average is computed will affect the balance amount.

Consumer Credit

Credit providers report outstanding balances to credit reporting agencies each month. Credit issuers typically report a borrower’s total outstanding balance at the time the report is provided. Some credit issuers may report outstanding balances when a statement is issued, while others report data on a specific day each month. Balances are reported on all types of revolving and non-revolving debt. With outstanding balances, credit issuers also report delinquent payments beginning at 60 days past due.

Timeliness of payments and outstanding balances are the top factors that affect a borrower’s credit score. Experts say borrowers should strive to keep their total outstanding balances below 30%. Borrowers using more than 30% of the total available debt out✤standing can easily improve their credit score from month to month by making larger payments that reduce their total outstanding balance.

When the total outst♉anding balance decreases, a borrower’s credit score improves. Timeliness, however, is not as easy to improve since delinquent payments are a factor that can remai꧃n on a credit report for seven years.

Calculating Average Outstanding Balance

Lenders typically calculate interest on revolving credit, such as credit cards or lines of credit, using an average of daily outstanding balances. The bank adds all the daily outstanding balances in the period (usually a month) and divides this su🐻m by the number of days in the period. The result is the average outstanding balance for the period.

For loans that are paid monthly, such as mortgages, a lender may instead take the arithmetic mean of the starting and ending balance for a statement cycle. For instance, say a home borrower has a mortgage balance of $100,000 at the start of the month and makes a payment on the 30th of the same month, reducing the outstanding principaꦬl amount to $99,000. The average outstanding balance for the loan over that period would be ($100,000-99,000)/2 = $99,500.

The Bottom Line

Many consum🍨ers carry a credit card balance every month. As the outstanding balance grows, it can be more challenging to pay off the debt. Most financial experts urge borrowers to p🍸ay off their credit cards every month to avoid paying interest and other fees.