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CandleFocus Glossary Editor
The Average Outstanding Balance is a key component of credit underwriting and determines the amount of interest that is charged on any kind of revolving loan, from installment loans to credit cards. This figure is reported by credit card companies to credit bureaus on a monthly basis for use in credit scoring and credit underwriting.
An outstanding balance represents the unpaid portion of any long-term or short-term loan or credit card debt. Outstanding balances typically incur interest and this interest is determined by calculating the average outstanding balance as it relates to the given time period.
The Average Outstanding Balance is usually calculated on a daily or monthly basis. The higher the Average Outstanding Balance is, the more likely it is that the borrower may be facing financial difficulties. For example, if a credit card has an average outstanding balance of $5,000 or more, the lender may see this as a sign that the borrower is having difficulty paying their debts. This will likely result in a higher interest rate being applied.
The Average Outstanding Balance can also be used as an indicator of a borrower's credit worthiness. Credit bureaus use this figure to ensure that lenders have an accurate picture of a borrower's current financial situation. For instance, if a borrower has a low Average Outstanding Balance, credit bureaus may see this as a sign that the borrower is using credit responsibly and is making their payments on time. On the other hand, if a borrower has a high Average Outstanding Balance, they may be seen as at a higher risk of defaulting on their payments.
In summary, the Average Outstanding Balance is an important figure used by lenders and credit bureaus to determine credit worthiness and the interest rate of a loan. High outstanding balances can be an indicator that a borrower may be experiencing financial difficulties, while low levels may indicate responsible financial management. It is important for borrowers to remember that the Average Outstanding Balance can have a significant impact on their credit score and borrowing ability, so it is important to keep it as low as possible.
An outstanding balance represents the unpaid portion of any long-term or short-term loan or credit card debt. Outstanding balances typically incur interest and this interest is determined by calculating the average outstanding balance as it relates to the given time period.
The Average Outstanding Balance is usually calculated on a daily or monthly basis. The higher the Average Outstanding Balance is, the more likely it is that the borrower may be facing financial difficulties. For example, if a credit card has an average outstanding balance of $5,000 or more, the lender may see this as a sign that the borrower is having difficulty paying their debts. This will likely result in a higher interest rate being applied.
The Average Outstanding Balance can also be used as an indicator of a borrower's credit worthiness. Credit bureaus use this figure to ensure that lenders have an accurate picture of a borrower's current financial situation. For instance, if a borrower has a low Average Outstanding Balance, credit bureaus may see this as a sign that the borrower is using credit responsibly and is making their payments on time. On the other hand, if a borrower has a high Average Outstanding Balance, they may be seen as at a higher risk of defaulting on their payments.
In summary, the Average Outstanding Balance is an important figure used by lenders and credit bureaus to determine credit worthiness and the interest rate of a loan. High outstanding balances can be an indicator that a borrower may be experiencing financial difficulties, while low levels may indicate responsible financial management. It is important for borrowers to remember that the Average Outstanding Balance can have a significant impact on their credit score and borrowing ability, so it is important to keep it as low as possible.