What is an 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, typically one month. This term applies to any term, installment, revolving, or credit card debt on which interest is charged. Moreover, it can signify an average measure of a borrower’s total outstanding balances over a set interval.
Average outstanding balance is distinct from the average collected balance, which represents the portion of the loan that has been repaid over the same duration.
Key Takeaways
- The average outstanding balance refers to the unpaid portion of any term, installment, revolving, or credit card debt on which interest is charged over a span of evaluation.
- Interest on revolving loans may be assessed using an average balance method.
- Credit card companies report outstanding balances to credit bureaus monthly, impacting credit scores and credit underwriting.
- You can calculate average outstanding balances based on daily, monthly, or another time frame.
- Large outstanding balances might indicate financial challenges for both lenders and borrowers.
Delving Deeper into Average Outstanding Balances
Average outstanding balances are crucial for numerous reasons. Lenders with portfolios containing several loans need to assess risk and profitability in aggregate terms. Banks use this measure to determine how much interest they either pay to account holders or charge to their borrowers. A substantial outstanding balance on a bank’s lending portfolio might suggest difficulties in loan repayment, potentially signaling future financial distress.
Credit card companies often use an average daily outstanding balance method to calculate interest applied to revolving credit loans. As purchases accumulate, the average daily balance method enables more accurate interest charges, reflecting balances throughout the month rather than only using the closing date balances.
For consumers, credit rating agencies factor in outstanding balances when determining FICO credit scores. Keeping credit card balances below limits is advisable to maintain good credit. High balances, late payments, and new credit applications increase outstanding balances and may negatively impact scores.
Interest on Average Outstanding Balances
For average daily outstanding balance calculations, creditors might average the balances over the past 30 days to assess interest on a daily basis. Typically, interest on average daily balances is a product of daily averages over a statement cycle, carrying interest on a cumulative daily basis at the end of the period.
The daily periodic rate is calculated as the annual percentage rate (APR) divided by 365. Should interest be assessed cumulatively at month’s end, it would only concern the number of days in the cycle.
Various methods exist for calculating average balances. A simple average, for example, might take the balance on the starting and ending date, divide it by two, and then apply the monthly interest rate.
Credit card agreements usually define the precise interest assessment methodology. Details about interest calculations and average balances are provided in monthly statements.
Navigating the World of Consumer Credit
Credit providers report outstanding balances to credit reporting agencies monthly. Such reports may reflect balance data from statement issuance or from specific monthly dates, encompassing all revolving and non-revolving debt.
Timeliness of payments and outstanding balances are vital in impact lenders when determining a borrower’s credit score—experts suggest these balances remain below 30% of total available credit. Lowering outstanding balances improves credit scores, while high balances and late payments can detrimentally affect them for several years. However, substantial shifts in outstanding balances can lead to time lags in credit reporting.
How to Calculate Average Outstanding Balance
To calculate interest on revolving credit like credit cards or lines of credit, a bank averages daily outstanding balances over a typical period of a month. They sum these daily balances and divide by the number of days in the period for an average outstanding balance figure.
For monthly paid loans like mortgages, lenders may average the starting and ending balances for a statement cycle. For example, if a mortgage has a starting balance of $100,000 and after a payment on the 30th, the balance reduces to $99,000, the average outstanding balance for that month would be ($100,000 - $99,000) / 2, resulting in $99,500.
Frequently Asked Questions
What is an outstanding balance?
An outstanding balance is the total amount still owed on a loan.
What is an outstanding principal balance?
The outstanding principal balance is the amount of the original loan principal that remains due, not accounting for interest or fees.
Where can I find my outstanding balance?
Borrowers can find this information on their bank or loan statements or obtain it through the lender’s website.
What is the difference between outstanding balance and remaining balance?
The outstanding balance refers to the amount still owed on a loan, while the remaining balance indicates the funds left in an account after spending or withdrawals.
What percentage of an outstanding balance is a minimum payment?
Minimum payments can be a fixed percentage, such as 2.5%, or a combination of a flat fee with a percentage, like $20 plus 1.75% of the balance. Penalty fees and past due amounts also contribute, increasing the minimum payment due.
Related Terms: average collected balance, FICO credit score, interest, credit score.
