What is the average outstanding balance?
– The average outstanding balance is the unpaid, interest-bearing amount on a loan or group of loans averaged over a defined interval (typically a month). It can apply to installment loans (mortgages, auto loans) and to revolving credit (credit cards, lines of credit). Lenders use this average to calculate interest and to assess portfolio risk; credit scoring models and card issuers also pay attention to borrowers’ reported balances.
Key definitions
– Outstanding balance: the total amount currently owed on an account (principal + any interest/fees not yet paid).
– Outstanding principal balance: the portion of the outstanding balance that is principal only — the original loan amount still unpaid, excluding interest and fees.
– Average daily balance: the sum of each day’s outstanding balance during a billing cycle divided by the number of days in that cycle.
– Daily periodic rate: the portion of the annual percentage rate (APR) applied per day; usually APR/365.
– Average collected balance: the portion of the loan repaid during the same period (contrasts with the outstanding balance).
– Credit utilization (utilization): the ratio of outstanding revolving balances to total available credit; commonly recommended to stay below 30%.
Why it matters
– Interest calculation: Many credit cards compute interest using the average daily balance so interest reflects day‑to‑day activity, not just the balance on the statement date.
– Risk & profitability: Lenders track average outstanding balances across portfolios to evaluate cash flow and collection performance.
– Credit scoring: Credit reporting agencies receive monthly balance data from issuers; reported outstanding balances affect utilization and thus FICO-style scores. Delinquencies (reported starting at 60 days past due) and high utilization can harm your score.
– Reporting timing: Issuers report balances at different times (statement date or a fixed day each month), so a borrower’s “real-time” debt may differ from what appears on a credit report.
How lenders commonly calculate average outstanding balances
1) Average daily balance method (typical for credit cards)
– Add up the outstanding balance for each day of the billing cycle.
– Divide that sum by the number of days in the cycle.
– Interest for the cycle = average daily balance × daily periodic rate × number of days (or sum daily balance × daily rate each day).
2) Simple monthly average (often used for installment loans)
– (Beginning balance + Ending balance) / 2
– Interest is then applied using the appropriate monthly rate.
Step‑by‑step checklist before you calculate or compare interest charges
– Check the cardholder/loan agreement to see which interest method is used.
– Find the APR and confirm whether the daily periodic rate is APR/365 (or another convention).
– Note the billing cycle length (number of days).
– Gather daily balances (for average-daily calculation) or beginning and ending balances (for simple average).
– Confirm transaction dates: payments/credits posted within the cycle change daily balances.
– Check your statement date vs. issuer reporting date to credit bureaus.
– Watch utilization: aim to keep revolving balances below ~30% of available credit.
Worked numeric examples
A. Credit card — average daily balance and interest
Assumptions:
– Billing cycle: 30 days.
– APR = 18% → daily periodic rate = 0.18 / 365 ≈ 0.00049315.
– Daily balances: days 1–10 = $1,000; days 11–20 = $500; days 21–30 = $1,200.
Calculation:
– Sum daily balances = (10×1,000) + (10×500) + (10×1,200) = 10,000 + 5,000 + 12,000 = $27,000.
– Average daily balance = 27,000 / 30 = $900.
– Interest for cycle ≈ average daily balance × daily rate × 30 = 900 × 0.00049315 ×