Average Outstanding Balance

8(a) Firm

What is an average outstanding balance?

An average unpaid balance is the unpaid, interest-bearing balance on a loan or loan portfolio, averaged over a period of time, usually one month. The average outstanding balance also refers to any term, installment, revolving or credit card debt on which interest is charged.

This can be contrasted with the average balance recovered, which corresponds to the part of the loan that has been repaid during the same period.

Since the remaining balance is an average, the period of time over which the average is calculated will affect the amount of the balance.

Understanding the average outstanding balance

The average outstanding balance on credit cards and loans is a factor in the consumer’s credit rating. Average unpaid balances are reported monthly to credit reporting agencies on active accounts, along with any amounts past due. Non-revolving loan balances will decrease each month with scheduled payments, while revolving debt balances will vary depending on the use of the credit card holder.

Averages are most often calculated on a daily or monthly basis. An average daily balance adds the current closing balances at the end of each day in a given period and divides the sum by the number of calendar days in that period. An average monthly balance adds up the closing balance at the end of each day and divides it by the number of calendar days in the month. A simple average balance between a start date and an end date is calculated by dividing the start balance plus the end balance by two.

Key points to remember

  • The average outstanding balance refers to the unpaid portion of any term, installment, revolving or credit card debt on which interest is charged.
  • Averages are most often calculated on a daily or monthly basis as a simple average between the start and end dates.
  • Outstanding balances are reported by credit providers to the credit reporting agencies each month and can have an impact on your credit score.

Interest on average outstanding balances

Many credit card companies use an average daily balance method to calculate the monthly interest charged to a credit card. Credit card users accumulate unpaid balances when they make purchases throughout the month. An average daily balance method allows a credit card company to charge slightly higher interest that takes account of a cardholder’s balances throughout the month, not just the closing date.

With average daily calculations of unpaid balances, the credit card company adds the unpaid balances for each day to a monthly billing cycle and divides them by the number of days. A daily periodic interest rate is also calculated and billed by the number of days in the billing cycle to arrive at the total monthly interest.

Some credit cards may provide details of the average outstanding balance on their credit card statements. If provided, it is usually the average daily outstanding balance over the billing cycle.

Credit Score Factors

Outstanding balances are reported by credit providers to the credit reporting agencies every month. Issuers of credit generally 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 choose to report data on a specific day each month. Balances are reported for all types of revolving and non-revolving debt. With outstanding balances, credit issuers also report overdue payments starting 60 days past due.

Timeliness of payments and unpaid balances are two factors that affect a borrower’s credit rating. Experts believe that borrowers should strive to keep their total balance below 40%. Borrowers using more than 40% of the total outstanding debt can easily improve their credit score from month to month by making larger payments that reduce their total outstanding balance. When the total past due balance decreases, a borrower’s credit score increases. Speed, however, is not as easy to improve as delinquent payments are a factor that can remain on a credit report for three to five years.

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