Credit cards are a convenient way to pay off daily expenses and purchases. They come with several perks, like reward systems, credit scores, cashback and discounts, and much more. However, they may also have drawbacks, like high interest rates, which can negatively affect your credit score if not paid back in time.
Credit card statements can also be tricky and challenging to understand, with different variables and aspects that the average person may not understand easily. The outstanding amount is one of the most crucial factors. A credit card’s outstanding balance must be paid regularly, and high interest fees can often be incurred if not paid in time.
Due to these different factors, owning and using a credit card may seem challenging. However, if used correctly, they can be valuable assets in increasing credit scores and getting exceptional benefits. In this article, we will break down what an outstanding balance is, what the outstanding amount means for credit cards, and how it ties into your credit score.
What is the outstanding amount on a credit card?
When individuals make transactions on their credit cards, they often have an outstanding amount or a debt they owe that incurs interest. It refers to the amount of money an individual owes and includes all charges made on that account that have not yet been paid for. This could be from purchases, interest fees, balance transfers, cash withdrawals, and other factors. For example, if an individual’s credit limit is Rs. 60000, and they have made purchases totalling Rs. 20000, their outstanding balance is Rs. 40000.
The meaning of an outstanding balance is often confused with the statement balance. However, these two figures are entirely different. Statement balances are the amounts that need to be paid in full at the end of each billing cycle to void racking up interest fees on the credit card.
The statement balance on a credit card refers to the amount the credit card bill is at the end of the billing cycle. For example, if an individual spent Rs. 5000 during a billing cycle, and the balance before that was Rs. 0, the following statement balance would be Rs. 5000.
How much of the outstanding balance should be paid?
The statement balance should be paid in full at the end of each billing cycle to avoid interest charges. However, individuals have the option to pay amounts more than the statement balance and up to the outstanding balance.
Certain credit card issuers may allow overpayments or “pay ahead” features on credit cards. Regularly paying the statement balance up to the outstanding balance has several benefits. Not only does this help you maintain a monthly budget, but regular payments can also help avoid credit card debt, unforeseen payments, overspending, high interest fees, and other adverse effects.
How does the outstanding amount on a credit card affect credit scores?
In India, a credit score refers to an individual’s creditworthiness and is denoted with a three-digit number. It is determined based on the individual’s credit history, loan repayment history, credit files, and other factors across different credit institutions.
One of the most widely used credit scores in the country is the CIBIL rating, calculated by the country’s Credit Information Bureau of India Limited, often known as CIBIL. The CIBIL credit ratings range between 300 and 900, and a score higher than 750 is considered good. But why do credit ratings matter? A high credit score helps individuals obtain quicker loan approvals, better deals on loans, and higher credit limits.
However, high outstanding balances on your credit card could negatively impact your credit scores, even when settled in a timely manner each billing cycle. This is due to the credit utilisation rate, which is calculated by dividing the credit limit by the current outstanding amount. For example, if your credit card limit is Rs. 10,000, and you use Rs. 8,000 out of it, the 80% credit use rate could negatively impact your credit score.
This is because higher credit usage indicates that an individual will have a harder time paying the amount back, increasing risk for lenders and making them less willing to lend money. To combat this, it is important to try to keep the credit utilisation rate low.
How can the outstanding amount be reduced and managed?
There are multiple strategies that can help individuals manage their outstanding amounts. These include:
1. Paying more than the minimum amount
Credit card issuers allow users to pay a minimum balance or amount every month to avoid incurring late fees. However, this can still lead to high-interest charges and outstanding amounts and to cycles of debt that become more difficult to repay year after year.
By paying more than the minimum amount, individuals can reduce the principal amount faster, reduce the amount of interest incurred, and clear debts more efficiently.
2. Utilise automatic payment options
Credit card due dates can be easy to miss in this fast-paced world. To avoid late payments and interest charges, consider setting up automatic payments that can cover at least the minimum fees due on a credit card. This ensures no late fees are incurred, and interest charges are kept to a minimum.
3. Consider balance transfers
Individuals with high-interest credit card debt can sometimes transfer over to a credit card with lower interest rates. This can reduce the amount they need to pay, allowing them to pay off their credit card outstanding balances quickly.
Summing up
High outstanding balances can lead to countless challenges, including high interest charges, difficulty finding lenders, lower credit scores, and lifelong debt in extreme cases. Thus, monitoring your credit card usage at all times is a crucial part of managing your finances. Monitoring your balance also ensures that you do not overspend for the month. By using it responsibly, credit cards can offer their users several advantages and a positive credit rating.
Are you considering opting for a credit card? Tata cards offer users cashback, discounts, points, welcome gifts, and countless other perks.
To learn more about Tata Capital’s credit cards, visit the Tata Capital website or download the app today.
04 December 2024
6 mins read
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