The outstanding balance on your credit card refers to the total amount you owe to the card issuer at the end of each billing cycle. While credit cards provide short-term flexibility to borrow, letting your outstanding balance persist or accumulate through minimum repayments can lead to a dangerous debt trap. Read on to find out what outstanding balance is and how you can manage it.
What is outstanding balance?
The outstanding balance is the total amount you owe on your credit card at the end of each billing cycle. It includes any new transactions, interest, fees charged in the cycle along with carried over balance from previous cycles. The outstanding keeps accumulating if you only make minimum payments. An unchecked outstanding balance snowballs into unaffordable debt due to compounded interest.
How is it calculated?
The outstanding balance is calculated by:
- Taking the starting balance at the beginning of the billing cycle
- Adding all new credit card charges made during the billing cycle
- Adding any interest accrued on existing balance
- Adding applicable fees like annual, late payment, cash withdrawal etc.
- Subtracting any payments made during the billing cycle
- Subtracting any credits received like cashback, rewards redemptions etc.
The final amount is the outstanding balance for that billing period. The statement shows this due amount and minimum payment needed.
Impact on credit score
High credit utilization i.e. using over 30% of your card limit and carrying forward large outstanding balances monthly hurts your credit score. This signals credit risk since you are dependent on debt. Try to keep utilization below 10% and repay consistently to prevent credit score damage. However, old outstanding balances impact your score less than recent misses.
Accumulation of interest
If you only pay the minimum due, interest is charged on the unpaid outstanding every month. Even small outstanding amounts accumulate painful levels of interest over time if not repaid actively. This diminishes your savings slowly but surely.
Minimum repayments do not reduce your principal balance substantially. As unpaid balances keep growing with added interest, your outstanding keeps increasing. This creates a debt trap next month the accumulated outstanding will generate even higher interest. Without discipline, outstanding can snowball into unmanageable debt.
Stress and financial chaos
Outstanding amounts cause constant stress about repayment capability. Excessive card spending also leads to financial mismanagement, impacting other goals like investments, retirement and child education costs. Uncontrolled outstanding dues due to lack of spending discipline derails household budgets.
How to manage outstanding balance
- Spend minimally and judiciously on credit cards. Unnecessary splurging is a major cause of ballooning outstanding.
- Pay much more than the minimum due every month, ideally entire bill. This stops interest accumulation.
- Consolidate multiple card dues into a lower rate personal loan or balance transfer card to save on interest.
- Consider converting outstanding into EMIs at lower effective interest rates. Most cards offer EMI facility on purchases.
- Hold a free credit card usage month once a year. Use only debit card/cash that month to minimize outstanding.
- Route bonuses, gifts, extra income immediately towards reducing outstanding rather than spending.
- Consider converting outstanding into EMIs at lower effective interest rates. You can calculate the EMI on credit card calculator.
Outstanding balance gives short term access to funds but derails finances and credit scores if uncontrolled. Moderated card spends, active debt repayment, avoidance of frivolous purchases and financial prudence are key to effectively managing it. Use credit cards judiciously as per your repayment capability and do not accumulate excessive outstanding debt.