What Is Average Outstanding Balance?
The average outstanding balance is the amount owed to a lender, including the balance after the last monthly payment and any interest accrued over time – usually after a month.
A credit balance or installment that is subject to an interest rate qualifies to be an average outstanding balance. It includes only an average amount of loans that clients have not settled or savings that clients have not withdrawn over a period.
Although the average outstanding balance serves many functions, it is mainly used as an instrument to evaluate interest on the debt. The type of average outstanding balance methodology employed determines the amount of interest to be paid by a client.
- The average outstanding balance refers to the unpaid portion of any term, installment, revolving, or credit card debt on which interest is charged over some period of time.
- 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 calculated based on daily, monthly, or some other time frame.
- Large outstanding balances can be an indicator of financial trouble for both lenders and borrowers.
How to Calculate Average Outstanding Balance
If you have multiple accounts, the balance is the sum of all account balances. Another measure used to measure the amount of unpaid, interest-bearing loan balance, such as credit cards, is referred to as the outstanding balance.
The average outstanding balance is a measure often used by creditors to determine how much of a loan portfolio is outstanding. The average is taken by looking at the beginning value and end of a specific time period.
Step 1. Identify your time frame. Sometimes the outstanding balance is calculated on a daily basis. Other times it is calculated on a monthly, quarterly, or annual balance. For this example, assume the time frame is one month, from January to February.
Step 2. Gather your information. You will need to obtain the average loan amount outstanding in the loan portfolio for the beginning of the time period and the end of the time period as well as the number of accounts held in the loan portfolio. Specifically, you will need the ending balance of your account for two different periods. For instance, assume the ending balance for January is $100,000 and the ending balance for February is $110,000.
Step 3. Find the average of the ending balance from January and the ending outstanding balance for February. The calculation is the end of the first month plus the end of the most recent month divided by two. The calculation for this example is $100,000 plus $110,000 divided by two, or $105,000.
Step 4. Divide the answer by the average number of accounts within the loan portfolio. Assume the number of accounts at both the end and beginning of the period is 10. $105,000 divided by 10 is $10,500.
Calculating Interest Using 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 on a daily basis. Commonly, average daily balance interest is a product of the average daily balances over a statement cycle with interest assessed on a cumulative daily basis at the end of the period.
Regardless, 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 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 then assessing interest based on a monthly rate.
Credit cards will provide their interest methodology in the cardholder agreement. Some companies may provide details on interest calculations and average balances in their monthly statements.
Average Outstanding Balance on Consumer Credit
Credit issuers report outstanding balances to credit reporting agencies every month. The total outstanding balance of a credit card is reported upon receiving the information.
However, while some credit providers may provide updates on their borrowers’ account status at the time a statement is issued, others opt to report outstanding balances on a particular day of every month.
Balances are reported for both revolving and non-revolving credit card users. Lenders also use outstanding balances to help in reporting delinquent payments that are late by sixty or more days. Borrowers’ credit scores are affected by the history and current capacity of outstanding balances.
Loan overdrafts and the timeliness of payments are the main factors that determine consumers’ credit scores. In practice, multiple balances and late payments reflect a borrower’s risks of default and lead to limited credit access by credit companies. Usually, borrowers are required to maintain their total outstanding balances below 30%.
Nevertheless, borrowers that exceed the required limit can repair their credit score by making lump-sum payments to reduce the total overdrafts. As the total outstanding balance decreases, the credit score increases, leading to increased accuracy and credit access.
Timeliness is costlier to improve, as it often makes borrowers appear to be at high risk of default. As a result, late payments and delinquencies typically stay on credit reports for a longer time – usually seven years – even if the borrower pays the total outstanding balance in full.