Average Outstanding Balance - Explained
What is the Average Outstanding Balance?
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Table of ContentsWhat is an Average Outstanding Balance?Calculate the Average Outstanding BalanceInterest on Average Outstanding BalancesCredit Score FactorsAcademic Research on Average Outstanding Balance
What is an Average Outstanding Balance?
The unpaid money which includes any dollar sum not accounted for and accrued interest from the previous billing period can be referred to as the average outstanding balance. It involves profit calculation and credit card portfolio account usage. It can also be defined as the division of the debt is also owed to a credit card portfolio by the amount of credit cards in that account. In simple terms, the average outstanding balance can be defined as any debt which may be a term, installment revolving or credit card debt; on which interest is chargeable. The average outstanding balance can be used by investors who may be buying a portfolio of credit cards to calculate the investments profitability capability.
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Calculate the Average Outstanding Balance
A simple average balance is calculated by adding a beginning and ending balance and dividing the total by 2. The weighted average balance takes into account the amount of time during the measurement period a balance was at a given point. The average balance is most commonly used by credit card firms when measuring finance charges using a weighted medium-scale balance. First, the average daily balance is estimated and then multiplied by the correct rate of interest. One of the factors present in the credit score of a consumer is the average outstanding balance on his loans and credit cards. Monthly reports on the average outstanding balances on active accounts in addition to the past due amounts are usually given to credit agencies.
- The unpaid money which includes any dollar sum not accounted for and accrued interest from the previous billing period can be referred to as the average outstanding balance.
- The average outstanding balance can be used by investors who may be buying a portfolio of credit cards to calculate the investments profitability capability.
- Monthly reports on the average outstanding balances on active accounts in addition to the past due amounts are usually given to credit agencies.
- One of the factors present in the credit score of a consumer is the average outstanding balance on his loans and credit cards.
- Two of the factors which affect the credit score of a borrower are the outstanding balances and how quickly debts are repaid.
Interest on Average Outstanding Balances
The monthly interest on a given credit card is usually measured with an average daily outstanding balance by a majority of credit card companies. As credit card users buy commodities and pay with their card throughout the month, the outstanding balances continue to pile up. When an average daily balance method is used by a credit card company, it gives room for the company to charge a little higher interest than normal after taking the card owners monthly balances into consideration. In some credit cardholders statements, details of the average outstanding balance are usually provided. This provision simply indicates the total daily remaining balance during the billing period.
Credit Score Factors
Credit companies report unpaid balances every month and the total remaining balance of a borrower to credit reporting agencies. Two of the factors which affect the credit score of a borrower are the outstanding balances and how quickly debts are repaid. Borrowers are advised by experts to have their outstanding balances below 40%; and borrowers who use over 40% of unpaid loans, from month to month, will easily boost their credit score by making bigger payments that lower their outstanding balance. A decrease in the total outstanding balances of a debtor will lead to a corresponding increase in his credit score. However, timeliness can not be changed easily as defaulting payments are a factor that can stay for three to five years within a credit report.
Academic Research on Average Outstanding Balance
- Effects of low income families' ability and willingness to use consumer credit on subsequentoutstandingcredit balances, Zhu, L. Y., & Meeks, C. B. (1994). Effects of low income families' ability and willingness to use consumer credit on subsequent outstanding credit balances.Journal of Consumer Affairs,28(2), 403-422. This study investigates consumer credit use of 618 low income families selected from the 1983 and 1986 Survey of Consumer Finances. The low income family's ability and willingness to use credit along with selected interaction variables are tested in a hierarchical multiple regression model. Significant determinants of the amount of credit outstanding in 1986 were household head's employment status and age, credit balance in 1983, and two interaction variables: specific attitude toward credit with head's educational level and with debt balance in 1983. Implications of the use of consumer credit by low income families are discussed.
- Value and yield risk onoutstandinginsured residential mortgages, Curley, A. J., & Guttentag, J. M. (1977). Value and yield risk on outstanding insured residential mortgages.The Journal of Finance,32(2), 403-412.Money management practices of college students, Henry, R. A., Weber, J. G., & Yarbrough, D. (2001). Money management practices of college students.College Student Journal,35(2), 244-244.
- The home economics of e-money: velocity, cash management, and discount rates of M-Pesa users, Mbiti, I., & Weil, D. N. (2013). The home economics of e-money: velocity, cash management, and discount rates of M-Pesa users.American Economic Review,103(3), 369-74. We study the mobile phone-based money transfer system in Kenya. Based on aggregate data, we estimate that the velocity with which units of e-money are transferred among users is approximately four times per month, and that the average number of transfers undergone by a unit of e-money between its creation and destruction is approximately one. Most M-Pesa transactions are made by frequent users. Examination of data on withdrawals shows a high frequency of small withdrawals and no response to "notches" in the price schedule, indicating that many users seem to have high implicit discount rates.
- Use migration analysis to refine estimates of future loan losses, Austin, D. G. (1991). Use migration analysis to refine estimates of future loan losses.Com. Lending Rev.,7, 34.