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When I was young, I always thought outstanding only meant something great — like my mom’s famous meatloaf surprise. You know, the best. But it wasn’t until I got into the wonderful world of finance that I realized it had a meaning that wasn’t as fantastic as my mom’s meatloaf.
In the world of credit cards, an outstanding balance is the amount of money you owe, including what you spend on purchases, balance transfers, and cash advances, plus all the interest and fees. To put it another way, it’s the total you’d have to pay to clear your balance completely.
An outstanding balance is the total amount of money you owe on your credit card, including purchases, interest, and fees, that remains unpaid.
If you want to get your finances in order and keep your credit score from sinking into the mud, you’ll have to wrap your head around outstanding balances. I’ll break down the whole shebang: how issuers calculate interest, typical fees, how it affects your credit score, and some strategies for knocking down your balance before it goes wild.
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Components of Your Outstanding Balance
Your outstanding balance is like a pile of different parts all lumped together to make up the total debt owed. Getting a handle on what’s in that pile will help you manage your debt.
Here’s what’s included in your outstanding balance.
Monthly Purchases
The things you buy on credit each month will total up to the outstanding credit card balance. Groceries, gas, and big-ticket items — just about anything you might buy, like that new TV or a trip — count one way or another.
And you’ll want to keep a tally of what you’re charging so the balance doesn’t grow faster than a field full of weeds. What you buy also plays a part in how fast an outstanding balance grows.
They may benefit from a 0% promotional rate, but sooner or later, outstanding balances get hit with the regular credit card interest.
Recurring costs like rent or subscriptions creep in and keep adding up month after month. You’ll have an easier time wrangling your balance if you keep a budget to track what you’re spending.
Cash Advances
Another chunk of your balance comes from cash advances, which is when you borrow cash directly from your credit card. Unlike regular old purchases, cash advances slap you with a higher interest rate right from the get-go.
They don’t give you any grace period, so the moment you take that cash, you’re racking up interest.
Cash advances start accruing interest immediately, so be wary of using your credit card to get some quick cash.
Due to those fees and high rates, cash advances can inflate your balance bigger than a politician’s ego. That means the best thing to do is withdraw an advance only in cases of extreme need because the costs can spiral out of control mighty fast.
Interest Charges
If you’re carrying around unpaid balances, those interest charges are going to hike up what you owe in a big way. When it comes to taking control of debt, understanding how credit cards go about calculating those interest charges is key.
Billing Cycles and Grace Periods
Credit card issuers split up the year into either 12 or 13 billing cycles. Each of these billing cycles covers the time between two account statements. All of your transactions, fees, and interest charges that piled up in that particular cycle are listed in your statement. The moment that cycle is up, you get a fresh statement–one that lays out all of your activities and sets a due date for payment.
A grace period is the time from when your statement date rolls around until the day your payment becomes due. You must at least pay the minimum amount by then, which usually ranges from 1% to 5% of what you owe.
The grace period typically lasts at least 21 days after the statement date. Pay your entire balance during this period to avoid interest charges. If you leave an outstanding balance, the card will suspend the grace period until you catch up.
Now, grace periods don’t apply to cash advances, and unless you’re wrangling a special promotion, they won’t cover balance transfers either.
If your card’s running a 0% interest deal on certain purchases, that works like a super-long grace period until the promo ends. After that, regular interest rates saddle up again and start riding.
How Interest is Calculated
Interest on a credit card is typically calculated using the daily balance method, but the average daily balance method is still used by some issuers. Knowing how these methods work will help you understand just how much those interest charges are going to stack up.
In the daily balance method, interest is based on what your balance looks like each day of the billing cycle. At the end of each day, your credit card takes your daily balance and multiplies it by the daily periodic rate — that’s just the annual percentage rate or APR divided by 365. Then, it tallies these interest charges each day to give you your total interest for the cycle.
A less-used method of calculating interest is called the previous balance method, but you won’t see that very much anymore. Here is a quick glance at all three methods and their impact on your finances:
- Average Daily Balance (ADB): Calculates interest by averaging the balances recorded each day over the billing cycle. Payments reduce the balance for later days, lowering the average balance and potential interest. ADB is suitable for those who carry a balance and make regular payments throughout the billing period.
- Daily Balance Method: Calculates interest by applying the daily interest rate to each day’s full balance, then summing up. Payments immediately lower the balance and reduce the interest for subsequent days. It helps those who pay off their balances quickly after making new charges.
- Previous Balance Method: It calculates interest based on the balance at the end of the previous billing cycle, regardless of changes during the current cycle. Payments do not affect interest charges in the current cycle, as they hinge on the previous cycle’s ending balance. It may not reflect current spending or payment habits, which is potentially unfair to those who pay off their balance.
The daily balance method usually leaves you with lower interest charges than the average daily balance method does. But if you use your smarts and pay the entire balance by the due date, you get off scot-free. Now, watch out, some cards do not have any grace period and begin charging interest from the instant you make a purchase. I would avoid those cards like a litter of skunks!
You can check which method your credit card uses by looking at your cardmember agreement. The issuer must spell out how it computes your interest charges in the document.
Ways to Minimize Interest
If you settle up every last cent by the due date, you won’t have to fork over a single penny in interest on your eligible purchases. That not only saves you from having interest pile up like firewood, but it also keeps your debt from growing. And, just like feeding your prize hog, responsible credit use makes your credit score fat and happy.
Another trick to rope in that interest is by taking advantage of 0% interest promotions. Lots of card companies offer deals with no interest on purchases or balance transfers for anywhere from six to 18 months after you open the account.
It’s like buying time to fix up the old homestead without spending extra. Just be sure to pay off the whole balance before the promotion ends, or you’ll find yourself knee-deep in interest.
Now, missing a payment date is something you always want to avoid. But it’s even worse if you’re in the middle of one of those new account promotions. If you miss a payment, the card company will likely cancel that sweet deal faster than a rooster chasing a June bug. They’ll start charging interest right away and might even slap you with a penalty APR of up to 29.9% or more. That’s a tough pill to swallow!
Other Common Fees
Well, believe it or not, credit cards aren’t just about interest — they have more ways to wring money out of you than you can shake a stick at! Most of these other costs come from a host of different fees, including annual fees, late payment fees, cash advance fees, and balance transfer fees.
Most of them slap on an annual fee, and that can range anywhere from $25 to a jaw-dropping $600 or more. The fancier the card–with all those rewards and benefits–the higher that fee climbs. It’s like buying purebred horses instead of broken-down nags.
Miss a payment? Well, you’ll get hit with late fees faster than you can say, “Oops!” If you don’t pay the minimum by the due date, you’ll be looking at charges every time, and that’ll stomp all over your credit score like a herd of buffalo. Some new rules might rein in these fees a bit, but they still pack a punch.
The moment you have that urge to pull out some cash, beware of those cash advance fees. These usually set you back about 3% to 5% of what you borrow. Therefore, treat cash advances the way you’d treat a boss with a bad temper — only mess with them if you have to!
Want to transfer debt from one credit card to another? That’ll be extra. Balance transfer fees typically range from 3% to 5%, so you’ll probably want to mull over the pros and cons of shifting your debt.
You should put on your thinking cap to prevent these fees. First off, always pay on time. Nothing says, “I got my act together,” like meeting your due dates. Set up automatic pay or reminders so you don’t forget.
Try looking into no-fee credit cards. They can reduce all of those fees and help you run your finances smoothly.
Effects of Carrying an Outstanding Balance
Carrying an outstanding credit balance is much like trying to drag a plow through the mud: It’s cumbersome and will just make your life all that much tougher. It will leave its mark on your credit score and your general financial health. Understanding these impacts is vital for managing your debt and maintaining a perfectly polished credit profile.
Impact on Credit Score
Carrying a balance messes with your credit score by jacking up your credit utilization ratio. That’s just a fancy term for how much of your available credit card limit you’re using at any given time. As your CUR starts climbing north of 30%, it sends a signal to the lenders that you might be stretching yourself thinner than a runway model. A high CUR can drag your credit score down super quickly.
You can lower your CUR by paying down your balances. You’re not only helping to boost your credit score, but you are making yourself look more trustworthy to lenders.
Here is a chart that shows an example CUR of someone who has three credit cards and $10,000 in total credit limits:
Card A | Card B | Card C | Overall | |
---|---|---|---|---|
Balance | $500 | $0 | $2,150 | $2,650 |
Credit Limit | $2,000 | $3,000 | $5,000 | $10,000 |
Utilization Ratio | 25% | 0% | 43% | 26.50% |
Another giant factor that goes into your credit score is payment history — how well you pay your bills on time. If you rely on carried balances, the likelihood of missing a payment goes up, and that will mess things up in a real hurry.
If that happens and a payment is delinquent by 30 days or more, the credit bureaus will be alerted. That blemish will stay on your credit report for a full seven years.
But here’s the good news: if you make at least the minimum payment on time every month, you won’t tank your credit score. Sticking to all those payments even when you’re carrying a balance is like patching a hole in your roof — you may not fix everything right away, but you’ll keep the rain from doing more damage.
Financial Consequences
Carrying an overdue balance on your credit card is like trying to carry water in a bucket with a hole in the bottom — you’re not going to get very far. That interest will keep piling up, letting your debt grow faster than you can repay it.
Now, if you’re only making the minimum payments, you’re just making the problem worse. Most of that payment goes directly to interest; you’re just nipping at the actual debt. You aren’t doing much to resolve the issue.
Making only the minimum payments on your credit cards will result in more interest on your debt and potentially years of additional payments.
It’ll take you forever to pay off the debt, and you’ll end up paying way more. If you want to kick that debt to the curb a little faster, pay more than the minimum every month. The more you pay, the quicker that balance burns down, and the less you’ll lose to interest charges. In other words, the faster you tackle it, the sooner you’ll be out of financial quicksand!
How to Manage and Reduce Outstanding Balances
Taking control of your outstanding balances requires a plan and a firm hand. Otherwise, if you don’t have a strategic approach and some financial discipline, your debt can gallop out of control faster than a spooked horse. Here are a few key approaches to help you lasso your credit card debt.
Create a Repayment Plan
A good repayment plan helps you chip away at that balance. First off, draw up a realistic budget that lets you see where you can tighten your belt and free up more money to throw at your debt.
Now, to pay off debts, there are two popular techniques: the snowball method and the avalanche method.
The snowball method has you pay off the smallest debts first to build momentum. Meanwhile, the avalanche method pays off the ones with higher interest rates first to cut your costs over the long haul.
Pick the one that works best for you — quick wins or long-term savings.
Identify Balance Transfer Options
Looking into balance transfer options will help you make progress on paying down your credit card debt.
The process of transferring debt from one credit card to another with a lower or 0% APR cuts down your interest costs and helps you retire your balance faster.
Take advantage of 0% APR balance transfer promotions. Remember that at the end of the promotion, any balance remaining will begin accruing interest at the regular APR. You’ll want to pay it off before the end of the promotion.
Alternatively, you can roll over the balance to a different card with another 0% APR promotional period, but you’ll be on the hook for more balance transfer fees.
Seek Professional Help
If that debt’s feeling heavier than a sack of bowling balls, professional advice might just be the thing you need.
Credit counseling services will afford you guidance on making a budget and crafting a plan to repay your debts.
The best part? You may be able to access these services for free.
If you enter a debt management program, a credit counselor will consolidate all your debts into one monthly payment and attempt to negotiate a lower interest rate for you in the bargain.
Outstanding Credit Card Balances Can Cost More Money
The balance you’re carrying on your credit card can send your costs skyrocketing faster than Fourth of July fireworks. The amount of interest piles higher and higher, making that debt ever larger. Make only the minimum payment, and most of that money pays the interest, barely taking a nibble out of your debt.
If you can, keep that outstanding balance under control. Manage it wisely, or you’ll be deeper in the hole than a groundhog after the rainstorm. Keep those costs at bay to return to solid financial ground.