What is an Outstanding Balance and How Can it Affect You?

Generally speaking, people use outstanding balance to refer to what they owe on their credit cards. However, it is important to note that the term can refer to what they owe on any of their debt that charges interest. As such, interested individuals should put some serious thought into their outstanding balance.

Why Is an Outstanding Balance a Potential Issue?

Here are some of the potential problems of having an outstanding balance.

It Is Expensive

The single biggest problem with an outstanding balance is that it is expensive. Simply put, interest is being charged on the principal on a constant basis, thus making for a bigger and bigger outstanding balance over time. Theoretically, interested individuals can prevent this by paying off their outstanding balance as soon as possible. In practice, well, suffice to say that a lot of people choose to pay their outstanding balance over a long period of time, with the result that their total cost can be much more than the initial borrowed sum.

It Is a Drain on Future Income

Speaking of which, this means that an outstanding balance is a drain on future income. After all, a part of the borrower's periodic income has to be used to make the periodic payment, thus reducing the amount of money that is available for other purchases. Of course, interested individuals can choose to pay more so that they can stop making these periodic payments sooner. However, that means an even smaller amount of money available for the time being.

It Increases the Chances of Financial Ruin

The more that people have to spend on their outstanding balance, the higher the chances of their financial ruin. In some cases, this is because people borrow more than what they can cover. However, it should be remembered that no one can predict the future with perfect certainty. As a result, it is very much possible for people to be hit by unexpected expenses, whether it is a medical bill, a repair bill, or something else altogether. Under ideal circumstances, they will have the savings needed to soak up such an occurrence. Unfortunately, not everyone has enough savings for this, particularly if they are hit by a sizable bill.

It Hinders the Fulfillment of Financial Goals

Savings come from the part of income that can be spent freely. A bigger outstanding balance means a smaller amount of income that can be spent freely, thus resulting in fiercer competition between potential choices for what is available. As such, a bigger outstanding balance can make it more difficult for people to fulfill financial goals, whether that means saving up for a home, saving up for an education, or something else altogether.

It Causes Stress

It is very common for people to be stressed out by their outstanding balance because they have at least some awareness of the potential issues listed here. This is a serious problem because stress has been connected to a wide range of medical problems. For example, stress has been shown to suppress people's immune system, thus increasing the chances of them falling sick. Similarly, stress has been linked with everything from obesity to heart problems and high blood pressure.

It Damages Personal Relationships

Perhaps unsurprisingly, a large amount of debt can put a large amount of strain on a personal relationship. In fact, it should be mentioned that finances are one of the most common reasons that romantic relationships fail, which is something that can have a wide range of unwanted and unpleasant knock-on effects.

It Lowers Your Credit Score

The outstanding balance relative to the maximum amount that can be borrowed is one of the most important factors in the calculation of a credit score. This makes sense because credit scores are meant to be a shorthand for creditworthiness. Since a bigger outstanding balance means higher costs, it makes someone less creditworthy. Thanks to this, someone with a bigger outstanding balance will have a harder time accessing financial products. They might not be able to access certain financial products altogether. Furthermore, even if they can access those financial products, they can expect higher interest rates as well as harsher borrowing conditions. Something that can make the use of them that much more burdensome.

What Are Some Suggestions for Paying Off Your Outstanding Balance?

Here are some suggestions for people seeking to pay their outstanding balance.

Stop Borrowing

First and foremost, people need to stop borrowing. This can sound simple enough. However, it is very common for people to build a big outstanding balance on their credit cards, which is a huge issue because using them is so convenient. If interested individuals are struggling with this, they should consider putting their credit cards in a place that will make it inconvenient for them to get access. This should provide them with more time to think about what they are doing, which should cut down on the number of impulsive uses.

Cut Costs

Moving on, the easiest way to pay an outstanding balance is to make bigger payments on a more frequent basis. The issue is that this is expensive, which leads to one of two potential issues. One, people can try to earn more, which tends to be difficult. Two, people can try to spend less, which also tends to be difficult but at least somewhat more doable. If people are stuck on what to cut, they can draw up a list of their regular spending to see what is and isn't necessary.

Automate Payments

If people are struggling to make the payments that they want to make, they should consider setting up automated payments. This removes the element of choice, thus making it impossible for them to choose to pay less now under the excuse that they will make up for it later.

Focus on the Highest-Interest Debt

Generally speaking, the best way to pay is to prioritze the highest-interest debt. This is because each payment will reduce the amount of money that has to be paid on a periodic basis, thus freeing up more money that can be used to reduce the outstanding balance. Something that makes for faster and faster repayment.

Focus on the Smallest-Sized Debt

Alternatively, people can consider prioritizing the smallest-sized debt. This won't help them repay their total debt faster. However, it can keep them committed to making their payments because they will see each one of their debts disappear faster than otherwise possible.