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, 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 average collected balance, which is that part of the loan that has been repaid over the same period.

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

Averages are most commonly calculated on a daily or monthly basis. An average daily balance adds the closing balances outstanding at the end of each day in a given period of time and divides the sum by the number of calendar days in that period. An average monthly balance sums 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 beginning and ending date is calculated by dividing the beginning balance plus the ending balance by two.

Interest on Average Outstanding Balances 

Many credit card companies use an average daily outstanding balance method for calculating monthly interest applied to a credit card. Credit card users accumulate outstanding balances as they make purchases throughout the month. An average daily balance method allows a credit card company to charge slightly higher interest that takes into consideration a cardholder’s balances throughout the month and not just at the closing date.

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

Some credit cards may provide details on the average outstanding balance in their credit card statement. If provided, this would typically be the average daily outstanding balance over the billing cycle.

Credit Score Factors

Outstanding balances are reported by credit providers to credit reporting agencies each month. Credit issuers typically report a borrower’s total outstanding balance at the time the report is provided. Some credit issuers may report outstanding balances at the time a statement is issued while others choose to report data on a specific day each month. Balances are reported on all types of revolving and non-revolving debt. With outstanding balances, credit issuers also report delinquent payments beginning with 60 days late.

Timeliness of payments and outstanding balances are two factors that affect a borrower’s credit score. Experts say borrowers should strive to keep their total outstanding balances below 40%. Borrowers using more than 40% of total available debt outstanding can easily improve their credit score from month to month by making larger payments that reduce their total outstanding balance. When the total outstanding balance decreases, a borrower’s credit score increases. Timeliness, 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.