Do you use a credit card for your daily expenses? If yes, then you might be familiar with the term ‘outstanding amount’. But do you know what it really means and how it affects your finances?
The outstanding amount is the total amount that you owe on your credit card at any given time. It is different from the statement balance, which is the amount that you have to pay by the due date to avoid interest charges. Your credit card outstanding amount can change every day, depending on your credit card usage and payments.
Why is the outstanding amount important? It determines how much credit you have left on your card and how much interest you will pay if you carry a balance. It also influences your credit score.
Interest on the outstanding credit card balance
One of the drawbacks of having an outstanding amount on your credit card is that you have to pay interest on it. Interest is the cost of borrowing money from the credit card company. The higher your outstanding amount, the more interest you will pay.
How much interest you pay on your outstanding amount depends on two factors: your interest rate and your average daily balance. Your interest rate is the percentage of interest that you pay annually on your outstanding amount. Your average daily balance is the sum of your outstanding amounts at the end of each day, divided by the number of days in the billing cycle.
Let us take an example. Suppose you have a credit card with a 15% interest rate and a Rs. 10,000 outstanding amount at the start of the month. If you do not make any payments or purchases during the month, your average daily balance will be Rs. 10,000. To calculate your interest for the month, you multiply your interest rate by your average daily balance and divide by 12. This gives you Rs. 125. This is the amount of interest that you will pay for the month. If you do this every month, you will end up paying Rs. 1,500 in interest for the year.
How can you reduce the interest that you pay on your outstanding amount?
The best way is to pay off your outstanding amount in full every month. This way, you will not carry any balance to the next month and avoid paying any interest.
Some credit cards also offer a grace period, which is a period of time after the billing cycle ends when you can pay off your outstanding amount without paying any interest. If you pay within the grace period, you will not incur any interest charges. However, if you miss the grace period, you will have to pay interest on the entire outstanding amount, not just the part that you did not pay.
The link between the outstanding amount on a credit card and credit score
Your outstanding amount on your credit card not only affects your interest payments, but also your credit score. Your credit score is a number that reflects your credit history and your ability to repay your debts. It is used by lenders, such as banks and credit card companies, to decide whether to approve your loan or credit card applications, and what interest rate to charge you.
One of the factors that influences your credit score is your credit utilisation ratio. This is the percentage of your available credit that you are using at any given time. It is calculated by dividing your outstanding amount by your credit limit and multiplying by 100.
For example, if your credit card limit is Rs. 50,000 and your outstanding amount is Rs. 35,000, your credit utilisation rate is 70%. This means that you are using 70% of your available credit.
This is important because a high credit utilisation rate indicates that you are relying too much on your credit card and may have trouble paying it back. This increases the risk for the lender and lowers your credit score. A low credit score can make it harder for you to get approved for loans or credit cards, or get favourable interest rates.
Ideally, you should keep your credit utilisation rate below 30%. This shows that you are using your credit cards responsibly and can manage your debt well. This improves your credit score and your chances of getting better credit offers.
Difference between the outstanding credit card balance and the statement balance
When you use a credit card, you may notice two different balances on your account: the outstanding balance and the statement balance.
The statement balance is the amount that you owe on your credit card based on the last statement or invoice that you received. It may be shown as a monthly balance or a new balance. It includes all the transactions, interest charges, fees, and other charges that occurred during the previous billing cycle.
The outstanding balance is the amount that you owe on your credit card at any given time. It is also called your current balance. It includes all the transactions, interest charges, fees, and other charges that have occurred since the last statement, as well as any unpaid statement balance.
The statement balance and the outstanding balance may or may not be the same. It depends on whether you have used your credit card or made any payments since the last statement was generated. If you have not used your credit card or made any payments, the statement balance and the outstanding balance will be the same. If you have used your credit card or made any payments, the statement balance and the outstanding balance will be different.
This difference is important because it affects how much interest you pay and how much credit you have available. If you pay your statement balance in full by the due date, you will not pay any interest on your credit card. However, if you only pay your outstanding balance, you may still pay some interest on the remaining statement balance. Also, if you have a high outstanding balance, you may have less credit available on your card, which can lower your credit score.
The outstanding amount on your credit card is an important factor that affects your finances. It determines how much interest you pay, how much credit you have available, and how your credit score is calculated. By understanding what the outstanding amount is, how it differs from the statement balance, and how it impacts your credit utilisation rate, you can manage your credit card debt more effectively and improve your financial health.
