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## The average outstanding balance, or AOB, is one of the fundamental ideas in finance. It represents the total amount of debt that has not been repaid over a given period of time, often one month.Â

Any loan type, including term loans, installment loans, revolving loans, and credit cards, may be included in the average outstanding balance calculation.

### How to Calculate the Average Outstanding Balance

The formula for calculating the average outstanding balance using the average daily balance method is:

**Average Outstanding Balance**= (Sum of Daily Balances) / (Number of Days in Billing Cycle)

For example, suppose a credit card has a billing cycle of 30 days, and the cardholder makes the following transactions:

Day 1: Beginning balance = $0

Day 5: Purchase = $500

Day 10: Payment = $200

Day 15: Purchase = $300

Day 20: Payment = $100

Day 25: Purchase = $200

Day 30: Ending balance = $700

The sum of daily balances can be calculated as follows:

**Sum of Daily Balances**= ($0 x 4) + ($500 x 5) + ($300 x 5) + ($600 x 5) + ($500 x 5) + ($700 x 6) = $17,000

Therefore, the average outstanding balance is:

**Average Outstanding Balance**= $17,000 / 30 = $566.67

### Why is the Average Outstanding Balance Important?

**Interest Charge**= (APR / 12) x Average Outstanding Balance

**Interest Charge**= (0.18 / 12) x $566.67

**Interest Charge**= $8.50

### How to Manage the Average Outstanding Balance

For borrowers who want to reduce their interest charges, improve their credit score, and avoid financial stress, it is advisable to manage their average outstanding balance carefully. Some tips to do so are:- Make a larger monthly payment on credit cards and other revolving loans than the required minimum. This will accelerate principal reduction and cut interest payments.
- Prioritize paying off high-interest debt. This will result in interest cost reductions and increase available cash flow for other costs or savings.
- Avoid using credit cards for irrational purchases or cash advances. This will stop the existing debt total from growing and the interest rates from rising.
- Keep track of the credit card payment due date and billing cycle. This will make it easier to organize payments and prevent late fees and penalties.
- Check the average debt due and the interest rates on the credit card statements. This will make it easier to keep track of the development and, if necessary, modify the payment plan.
- Ask the credit card company to reduce the interest rate or increase the credit limit. As a result, the credit score will rise and the interest rates and credit utilization ratio will decline.