Managing your money can feel like a delicate balancing act. Among those priorities is knowing how much you owe on your credit card. While finance terms can sound daunting, they don’t have to be. A little knowledge and you can make more informed decisions. What exactly is an outstanding balance? How does it differ from your statement balance? Why does it matter, and how can an outstanding balance impact your overall financial well-being? Keep reading to learn tips for keeping your credit card outstanding balance on track and increasing your odds of achieving a bright financial future.
Understanding Outstanding Balance and Statement Balance
Before we get into the weeds of how to tackle your debt, let’s clear up a couple terms: outstanding balance and statement balance. Many people use these terms interchangeably when they’re not and it’s important to understand the difference. Here’s what each of them means.
How the Two Balances Differ
Your statement balance is the amount showing on your credit card statement at the end of your billing cycle. It includes all your purchases and charges for that billing cycle, plus any interest and fees assessed. An outstanding balance, meanwhile, is the amount owed on your credit card at any given point in time. It includes those recent purchases, interest and fees, plus any payments you’ve made since your last statement.
Your statement balance and outstanding balance are both money owed, but one is a snapshot at the close of your billing cycle and the other is the real-time amount owed including all recent transactions.
Why It Matters to Your Financial Health
Understanding the difference between statement balance and outstanding balance could save you interest charges. How? If you keep track of your outstanding balance and pay your statement balance in full each month, you’ll avoid paying interest and stay on top of your debts.
If you’re only making the minimum payment on your credit card, your balance rolls over into next month, leaving that amount to accrue interest. The best way to get ahead of this is to get in the habit of paying off your statement balance in full and, if you can, make payments to your outstanding balance to avoid accruing interest.
The Elements That Make Up Your Outstanding Balance
Next, let’s dig into the elements that make up your outstanding balance. What goes into determining how much you owe, and why does it change over time?
Purchases and Charges
Every time you use your credit card, from groceries to gas, your outstanding balance goes up. Every charge adds to the amount outstanding that you owe - it doesn’t matter if the charge is large or small, each will increase your balance and influence your ability to pay your credit card back in full each month.
Interest and Fees
The thing that has the potential to inflate your outstanding balance the most is interest! If you carry over a balance from month to month, your credit card company will charge you interest on that balance. Fees such as late fees or an annual fee could also be driving the number up. Those charges add up fast! Make sure you understand the interest rate on your credit card and any fees that may be associated with it.
Here’s how to manage your outstanding balance
Maintaining control of your credit card outstanding balance is essential if you want to avoid falling into debt and keep your finances stable. Here are some ways that can help you keep track of your credit card balances.
Pay Your Statement Balance in Full
To avoid paying interest unnecessarily and to keep your balances from ever being carried forward, pay your statement balance in full by the due date. That way, you don’t incur any interest charges and your total resets to zero for the next billing cycle.
Track Your Spending and Pay Early
Keep an eye on your outstanding balance throughout the month. If you notice it getting higher than you expected, make an extra payment before the end of your billing cycle to reduce your outstanding balance and help avoid accruing interest.
Pay More Than the Minimum
Paying only the minimum keeps your account current, but won’t do much to eliminate your debt. Make bigger payments to pay down your balance faster and break the snowball.
The Impact of Outstanding Balance on Your Credit Score
Your outstanding balance doesn’t just limit your ability to manage debt; it also affects your credit score. Your credit utilization ratio—how much of your available credit you’re using—affects your credit score. That’s why managing your credit card outstanding balance is so important.
Credit Utilization and Its Importance
Credit bureaus look at your credit utilization, which measures how much of your total available credit you’re using. You want that percentage to be below 30%, i.e. if your total credit across all your revolving credit accounts is $10,000, you want your total outstanding balance to be below $3,000. High utilization is a sign to those credit reporting agencies that you have a reliance on credit, bringing your score down in the process. Sticking to a low balance may keep you score above water.
Strategies to Avoid Debt & Maintain a Healthy Balance
Here are a few strategies to help you avoid credit card debt and keep your outstanding balance at a healthy level.
Strategy #1: Use a Cash Loan for Big Purchases
If you’re looking to make a big purchase but don’t want a huge balance owing on your credit card, consider taking out a cash loan. A cash loan usually has a lower interest rate than your credit card.
Strategy 2: Set Up Automatic Payments
Set up automatic payments of your credit card statement balance to ensure you never miss a payment and avoid late fees and interest charges.
Strategy 3: Monitor Your Spending Regularly
An easy way to manage your balance is to keep tabs on your spending. Many credit card apps now let you see your spending as you rack it up, allowing you to rein yourself in before your balance spirals out of control.
Conclusion
Knowing how to distinguish between statement balance and outstanding balance is essential to keeping your credit card debt in check. As long as you’re able to pay your bill on time and pay your statement balance in full, you shouldn’t incur any interest charges. Knowing how your outstanding balance impacts your credit score can also help keep a healthy credit score. Use the strategies we’ve covered to manage your debt and have a healthy credit future.