What Is Average Outstanding Balance?

What Is Average Outstanding Balance?

Let me explain to you what an average outstanding balance is—it's the unpaid, interest-bearing balance of a loan or a portfolio of loans, averaged over a period of time, usually one month. You can apply this to any type of debt where interest is charged, like term loans, installment loans, revolving credit, or credit cards. It might also represent an average of a borrower's total outstanding balances over some timeframe.

This contrasts with the average collected balance, which is the portion of the loan that's been repaid over the same period.

Understanding Average Outstanding Balance

Average outstanding balances matter for several reasons, and I'll walk you through them. Lenders manage portfolios of many loans, and they need to evaluate risk and profitability. Banks use this average to figure out how much interest to pay account holders or charge borrowers. If a bank has a large outstanding balance in its lending portfolio, it might mean they're struggling to collect on loans, which could point to future financial issues.

Many credit card companies use an average daily outstanding balance to calculate interest on revolving credit, especially credit cards. As you make purchases throughout the month, your outstanding balance builds up. This method lets the company charge a bit more interest by considering your balances over the past days in the period, not just at the end.

For you as a borrower, credit rating agencies look at your outstanding balances on credit cards when determining your FICO score. You should keep your credit card balances well below your limits to show restraint. Maxing out cards, paying late, or applying for new credit raises your outstanding balances and can drop your FICO score.

Fast Fact

According to the Federal Reserve, the national outstanding balance on credit cards rose by $27 billion in Q2 of 2024, hitting $1.14 trillion—that's 5.8% higher than in Q2 of 2023.

Interest on Average Outstanding Balances

With average daily outstanding balance calculations, the creditor averages the balances over the past 30 days and assesses interest daily. Often, this interest is the product of the average daily balances over a statement cycle, with interest added up daily and charged at the end.

The daily periodic rate is the APR divided by 365. If interest is assessed at the end of the cycle, it's based on the number of days in that cycle.

Other methods exist, like a simple average between a beginning and ending date—add the starting and ending balances, divide by two, and assess interest on a monthly rate.

Credit cards detail their interest methodology in the cardholder agreement, and some include calculation details in monthly statements. Since it's an average, the time period you use affects the balance amount.

Consumer Credit

Credit providers report outstanding balances to credit reporting agencies each month. They usually report your total outstanding balance at the time of the report. Some do it when the statement is issued, others on a specific day each month. This covers all types of revolving and non-revolving debt, and they also report delinquent payments starting at 60 days past due.

Timeliness of payments and outstanding balances are the biggest factors in your credit score. Experts advise keeping total outstanding balances below 30%. If you're using more than 30% of your available credit, you can improve your score by making larger payments to reduce the balance.

When your total outstanding balance drops, your credit score improves. But timeliness is harder to fix—delinquent payments can stay on your credit report for seven years.

Important Note

Average balances aren't always part of credit scoring methods. But if your balances change a lot quickly due to paying off or adding debt, there's usually a lag in reporting to the credit bureau, making it hard to track real-time balances.

Calculating Average Outstanding Balance

Lenders calculate interest on revolving credit like credit cards or lines of credit using an average of daily outstanding balances. They add up all daily balances in the period—usually a month—and divide by the number of days. That's your average for the period.

For monthly paid loans like mortgages, they might take the average of the starting and ending balance for the cycle. For example, if you start with a $100,000 mortgage balance and pay it down to $99,000 by the end of the month, the average is ($100,000 + $99,000)/2 = $99,500.

What Is an Outstanding Balance and Outstanding Principal Balance?

An outstanding balance is the total amount you still owe on a loan or credit card. The outstanding principal balance is just the original loan amount still due, without including interest or fees.

Where Can I Find My Outstanding Balance?

Log into your bank account or check your latest credit card or loan statement—you'll see the outstanding balance listed there.

How Much Do Most People Have Outstanding on Their Credit Cards?

According to the Federal Reserve, Americans owe a combined $1.14 trillion in credit card debt as of Q2 2024, more than before, with delinquency rates up 9.1% from the previous year.

The Bottom Line

Many consumers carry a credit card balance each month, and as it grows, paying it off gets tougher. Most financial experts tell you to pay off your credit cards fully every month to avoid interest and fees.