Your credit score is more than just a number—it’s a reflection of how well you manage debt. While there are several factors that influence your credit score, one that often flies under the radar is your average outstanding balance. Understanding how this works can help you make smarter decisions when it comes to borrowing and spending. And the good news? Used wisely, it can even improve your credit.
Let’s break it down into simple terms and uncover five positive ways your average outstanding balance can actually work in your favor.
What is Average Outstanding Balance?
Before we dive into how it helps your credit, let’s get clear on what it actually means.
Your average outstanding balance is the average amount of debt you carry over a specific period—usually a billing cycle. Think of it as the running tally of what you owe on your credit cards or loan accounts throughout the month.
For example, if your credit card balance is $500 for the first 15 days of the month and $1,000 for the next 15 days, your average outstanding balance would be:
($500 + $1,000) ÷ 2 = $750
This figure is important because it gives lenders a snapshot of your spending habits and debt management—not just how much you owe at a single point in time.
(Want to know more about the formal definition? Check out this Investopedia article for a deeper dive.)
Here Are 5 Ways Average Outstanding Balance Can Boost Your Credit
1. Shows Responsible Credit Usage
Are you using your credit card regularly but not maxing it out? Good on you! A lower average outstanding balance suggests you’re using your credit responsibly without over-extending yourself.
Lenders like to see this because it tells them you’re not relying too heavily on credit. You’re essentially saying, “I use credit, but I don’t depend on it.” That’s a green flag in their book.
Pro Tip: Try to keep your average balance below 30% of your total credit limit for better credit scores.
2. Stabilizes Your Credit Utilization Ratio
Your credit utilization ratio is the percentage of available credit you’re actually using. So, if your limit is $5,000 and your average balance is $1,000, you’re at 20% utilization. That’s great!
Why does this matter? Because utilization is one of the biggest factors in your credit score—making up about 30% of the calculation. A lower average balance helps keep your utilization ratio in the so-called “safe zone,” and that can give your score a nice boost.
3. Minimizes Fluctuations in Credit Reports
Sometimes people will make a big purchase right before their statement closing date, hiking up their balance when the lender reports it to credit bureaus. That can bring your score down temporarily.
But if your average outstanding balance stays low because of consistent payments throughout the month, it smooths out those high points. Creditors like this type of consistency—it’s a sign of good financial behavior.
So instead of big spikes and dips, your debt profile shows stability. And that’s music to lenders’ ears.
4. Helps During Manual Credit Reviews
Ever applied for a loan or mortgage and had someone look deeper into your finances? That’s called a manual credit review. In these cases, lenders often examine your average balances to assess how well you manage debt over time.
Keeping a moderate average balance proves that you’re not just playing the timing game to look good on paper—you’re genuinely managing your money responsibly. It highlights your long-term habits, and that could make a big difference when you’re trying to get approved.
5. Improves Trust with Lenders
Let’s face it: Trust is everything in the world of credit. When lenders see that you’ve kept a reasonable average outstanding balance over time, it’s like showing them a track record of reliability.
This kind of trust-building behavior can lead to perks like:
- Higher credit limits
- Lower interest rates
- Better loan offers in the future
Remember: Good credit habits build long-term financial opportunities. Your average outstanding balance is just one piece of the puzzle—but it’s a powerful one.
How to Keep Your Average Outstanding Balance in Check
Keeping a manageable balance isn’t just good for your credit—it’s good for your wallet too. Here are a few ways to make it part of your routine:
- Pay more than the minimum: Always try to clear as much of your balance as possible to lower your average.
- Set payment reminders: Avoid late fees and interest by staying on track with monthly payments.
- Check your balances weekly: Use your banking app to spot and fix spending before it adds up.
- Keep unused cards open: This increases your total credit limit and can help lower your utilization ratio.
Looking for more tips on managing credit wisely? Head over to our Financial Wellness Guide for expert advice.
Final Thoughts
The concept of average outstanding balance might seem like just another technical credit term, but it can play a significant role in your financial health. By understanding it and keeping your balances low, you not only show lenders you’re responsible, but you also improve important aspects of your credit profile.
So next time you swipe that card—or better yet, when you make a payment—remember: Every little action helps shape the bigger picture. Stay consistent, stay smart, and your score will thank you for it.
Want to go deeper on this topic? Don’t forget to read the full article on Investopedia.
Your journey to better credit starts with smart habits. Let your average balance speak for your financial responsibility!