Have you ever checked your credit card statement or loan account and wondered about the "outstanding balance"? You're not alone. Most of us have encountered this term but understanding what it truly means can make a significant difference in managing our finances. In this blog post, we explore the concept of outstanding balances, breaking down its components, and discussing its impact on your finances. Read on as we delve into practical tips on how to calculate and manage your outstanding balances effectively and take control of your financial future.
What is an Outstanding Balance?
In general, the outstanding balance or outstanding amount refers to the total unpaid dues to a loan account or a credit card. The total outstanding balance includes the principal unpaid amount, interest charges, any penalties, balance transfers, cash advances along with any other applicable charges.
Practical Example of Outstanding Balance
A practical example for understanding outstanding balance in personal finance is that of a credit card. Consider that you have a credit card with a total credit limit of ₹1,00,000. If you make a purchase worth of ₹25,000, then ₹25,000 is your outstanding amount for the current billing cycle. If you make a payment of ₹10,000 toward your credit card outstanding amount, then the outstanding balance becomes ₹15,000 (plus interest charged by the lender on the unpaid amount and any other penalties).
Components of Outstanding Balance
In personal finance, the outstanding balance toward a loan account or credit card is comprised of the following three primary components.
1. Principal amount – This component is the actual unpaid loan amount that you’ve borrowed. In the case of a credit card, this is the unpaid amount toward your credit card purchases.
2. Overdue interest – Overdue interest is the interest charged toward your unpaid outstanding amount. It is charged by lenders on the remaining outstanding amount if you make partial payments.
3. Accrued interest - Accrued interest is the interest that accumulates on the outstanding principal amount over time. It represents the cost of borrowing that has been incurred but has not yet paid. This interest continues to accumulate daily until the borrower makes a payment, impacting on the total amount owed.
Effect of Outstanding Balance on Your Finances
Your outstanding balance can have several significant impacts on your financial health. Here are the key areas to consider:
1. Impact on credit score - Any outstanding balance significantly affects your credit score . High balances relative to your credit limit increase your credit utilization ratio, which negatively impacts your credit score. Maintaining a low balance or paying off your balance in full helps improve your credit score.
2. Accumulation of interest - When you carry an outstanding balance, interest accumulates on the unpaid amount. This means the longer you take to pay off your balance, the more interest you will owe, increasing your total debt. Managing your balances effectively can help minimize these additional costs.
3. Potential legal action - If you fail to pay your outstanding balance for an extended period, lenders may take legal action to recover the debt. It is crucial to address outstanding balances promptly to avoid these severe consequences.
How to Calculate Outstanding Balance Amount
Paying off the outstanding balance amount in full is imperative to avoid the negative impact on your finances. Here is a step-by-step guide to estimate your total outstanding balance amount toward a loan account or credit card.
1. Identify the Principal Amount: This is the original amount borrowed i.e., the initial loan amount/credit card balance.
2. Add Accrued Interest: Calculate the interest accumulated over time on the principal amount by multiplying the principal by the interest rate and the time.
3. Include Overdue Interest: Add any interest from missed payments, based on your loan or credit agreement terms.
4. Subtract Payments Made: Deduct any payments you have made towards the principal and interest to get the remaining balance.
5. Consider Additional Fees: Include any late payment fees or service charges that can increase your outstanding balance.
6. Review Your Statement: Ensure all calculations are accurate and up to date by checking your latest statement.
To Conclude
Paying off your outstanding balances on time is essential for good financial health. It is important to understand that components such as the principal amount, accrued interest, and overdue interest constitute the total outstanding amount. Failing to clear the principal outstanding balance almost always gives way to additional interest charges and penalties. Therefore, it is imperative to calculate the outstanding balances toward your loan/credit card accounts and make full repayments without delay. This in turn allows you to maintain good credit health and avoid any potential legal action by the lender.
Frequently Asked Questions
1. What is outstanding balance?
The outstanding balance is the total unpaid dues toward a loan account or a credit card. For example, if you have a credit card with a limit of ₹1 Lakh and spend ₹15,000, then your outstanding balance amount is ₹15,000 plus additional interests/charges depending on the lender.
2. Is it mandatory to pay the outstanding balance?
It is recommended that you pay all outstanding balances in due time to avoid any negative impact on credit scores. In the case of a credit card, lenders often allow you to pay a minimum amount although the remaining amount is liable to be charged with interest until paid in full.
3. How do I calculate my outstanding balance amount?
The outstanding amount comprised of three fundamental components i.e., the principal amount, the overdue interest and the accrued interest. Calculate these three components and subtract any payments that you have made toward the current billing cycle to calculate your outstanding balance amount.