What is outstanding amount in Credit Card

Introduction: About credit card expenses and balance
 

Credit cards have become an integral part of personal finance, providing access to credit for a range of expenses, from daily purchases to larger financial commitments. They offer benefits like reward points, cashback offers, and special discounts. However, the convenience of credit cards comes with the responsibility to manage expenses carefully to avoid debt accumulation. One of the most critical aspects of credit card management is understanding your balance.

Your credit card balance can be confusing due to the different terms used, such as "current balance," "statement balance," and "outstanding amount." Each of these terms reflects a different aspect of your credit usage and repayment cycle. Knowing the differences can help you manage your finances better and avoid penalties, interest charges, and damage to your credit score.

What is the outstanding amount on a credit card?
 

The outstanding amount on a credit card refers to the total sum of money you owe to the bank or financial institution at any given time. This amount includes any unpaid purchases, fees, interest charges, and other transactions that have not yet been paid off.

It is essentially the total of all transactions made using your credit card, minus any payments you have already made. The outstanding amount continues to increase with new transactions or accrues interest if not paid by the due date. Paying off the outstanding amount on or before the due date helps you avoid interest charges and late fees, thereby maintaining a healthy credit score and financial discipline.

Outstanding balance vs current balance vs statement balance
 

Understanding the differences between the outstanding balance, current balance, and statement balance is crucial for managing your credit card expenses effectively. Each of these balances reflects a different state of your credit card usage and has distinct implications.

1. Outstanding balance: The outstanding balance is the total amount you owe on your credit card at any point in time, including any new purchases, fees, or interest charges that have not been paid. This balance can change daily as new transactions are made or payments are posted. It represents the immediate financial obligation you have to the bank and impacts interest calculations.

2. Current balance: The current balance includes all charges and payments made on your card, including any transactions since your last statement. It updates in real time, reflecting all ongoing transactions. This balance gives you the most recent picture of your total debt but is not the amount due immediately.

3. Statement balance: The statement balance is the amount you owed at the end of the last billing cycle, which is the total of all transactions and charges within that period. It remains constant throughout the billing period until the next statement is generated. This is the amount you need to pay by the due date to avoid interest charges on new purchases.

What is an average outstanding balance?
 

The average outstanding balance refers to the average amount of debt carried over from month to month on a credit card. It is calculated by adding all outstanding balances for each day of the billing period and dividing by the number of days in that period. A lower average outstanding balance is generally preferred as it indicates good credit management, reduces interest payments, and positively impacts your credit score.

Maintaining a low average outstanding balance ensures that you do not fall into a debt trap and can manage your finances without accruing high-interest charges. It also reflects your financial discipline and ability to pay off dues promptly.

Interest on the outstanding credit card balance
 

Interest on the outstanding credit card balance is charged when you do not pay the full amount due by the statement due date. This interest is typically calculated daily on the remaining balance from the date of each transaction until the outstanding amount is paid in full.

Credit card interest rates can be quite high, often ranging up to 48% per annum, depending on the terms set by the bank. The longer you carry forward an outstanding balance, the more interest you accumulate, which can significantly increase your debt. Therefore, it is advisable to pay off the outstanding balance as quickly as possible to avoid the accumulation of interest and fees.
Assume you have a ₹7,000 monthly balance. If you pay 15% interest, your monthly payment will be ₹87.50 and ₹1,050 per year. Most of this interest expenditure can be avoided by paying off the outstanding amount each month. IDFC FIRST Bank credit cards have a grace period or interest-free period extending up to 50 days. You will not incur any interest if you settle the outstanding debt within this period every billing cycle.

Additionally, you can opt for a credit card like FIRST WOW! credit card that offers interest rates starting as low as 9% APR for an affordable interest payment and is secured with a fixed deposit. It helps you avoid any debt accumulation since the FD acts as a collateral. The FIRST WOW! credit card from IDFC FIRST Bank is a card for everyone which can be obtained without salary or credit check and comes with extensive benefits ranging from shopping to travel privileges.

Should you pay the outstanding balance and how much?
 

Yes, you should aim to pay the outstanding balance in full, or as much of it as possible, every month. Paying off the full outstanding balance ensures that you avoid interest charges and maintain a healthy credit score. If paying the full amount is not feasible, you should at least pay the minimum amount due, as specified in your credit card statement, to avoid late payment fees and damage to your credit score.

Ideally, you should make more than the minimum payment each month to reduce your debt faster and minimise interest charges. Regularly paying more than the minimum amount will help you maintain a good credit rating and avoid the snowball effect of accumulating debt.

How credit card outstanding amount can affect credit score
 

The outstanding amount on your credit card can significantly impact your credit score. A high outstanding balance indicates a higher credit utilisation ratio, which is the ratio of your credit card debt to your total credit limit. A credit utilisation ratio above 30% can negatively affect your credit score as it suggests that you are heavily reliant on credit.

Additionally, if you consistently carry forward a high outstanding balance and miss payments, it can lead to a drop in your credit score. Regularly clearing your outstanding balance and keeping your credit utilisation low demonstrates responsible credit behaviour, which positively influences your credit score.

Conclusion

A credit card can be a true asset if you know how to use it. Having the right card is equally important, as it can help you earn cashback, which reduces your liability. Explore  various  credit card options from IDFC FIRST Bank and make your shopping experience more rewarding. The interest rates applicable on the cards are some of the most affordable in the industry. You can also use the different EMI options to save more with the IDFC FIRST Bank FIRST SWYP credit card that only levies a fixed monthly conversion fee on converting your purchases to EMI (eligible purchases), and comes with no interest charges, making it one of most affordable cards in the market.