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Unpaid Balance: Characteristics, How It Is Calculated

 The unpaid balance is the principal plus the interest that remains to be paid on a loan or the average of a loan portfolio (any term, installment, money order or credit card debt, on which interest is charged), for a period of time, usually a month.

The unpaid balance is money that is borrowed, but is not paid in full by the due date. The lender uses this balance to calculate on your statement how much interest is owed for that period. Credit bureaus base a borrower's credit worthiness on any unpaid balances they have.

The closer the borrower's debt is to its borrowing limit, the more it will be considered a financial liability. As with bad balances, credit bureaus also look at how credit is maintained with lenders.

Paying the unpaid balance on each statement in full keeps the borrower's credit at the highest level. It also gives a high credit rating to the borrower.


Credit providers report unpaid balances to credit reporting agencies each month. Credit issuers generally report the total outstanding balance for each borrower at the time the report is submitted.

Balances are reported on all types of debts, revolving and non-renewable. With unpaid balances, credit issuers also report delinquent payments that are more than 60 days late.

Factors for credit rating

Timely payments and unpaid balances are two factors that affect a borrower's credit rating. Experts say that borrowers should strive to keep their total unpaid balances below 40%.

Borrowers with total bad debt greater than 40% can easily improve their credit rating by making larger monthly payments that lower their total bad debt.

As the total unpaid balance decreases, the borrower's credit rating increases. However, punctuality is not so easy to improve. Late payments are a factor that can last three to five years on a credit report.

Average unpaid balance on credit cards and loans is an important factor in a consumer's credit rating.

On a monthly basis, average unpaid balances on active accounts are reported to the credit bureaus, along with any other amounts that are already past due.

Non-revolving loan balances will decrease monthly with scheduled payments. The balances of revolving debts will vary depending on how the holder uses his credit card.

How is it calculated?

The basic formula for calculating an unpaid balance is to take the original balance and subtract the payments made. However, interest charges complicate the equation for mortgages and other loans.

Because a portion of loan payments is applied to interest payments, an amortization table must be created to calculate the outstanding balance of a loan.

An amortization table allows you to calculate how much of the payment is applied to the principal and what part to pay interest. To create an amortization table and calculate the unpaid balance, follow these steps:

Create depreciation table

Loan details are listed first; for example:

- Loan amount = $ 600,000

- Amount to pay monthly = $ 5000

- Monthly interest rate = 0.4%

The monthly interest rate is calculated by dividing the annual interest rate by the number of payments made each year. For example, if the loan has an annual interest rate of 5% and the payments are monthly, the monthly interest rate is 5% divided by 12: 0.4%.

Five columns are created for the amortization table: payment number, payment amount, interest payment, principal payment, and unpaid balance.

Under "payment number", in the first row the number 0 is written. Below "unpaid balance", in that first row the original amount of the loan is written. In this example it would be $ 600,000.

Record the first payment

In the column "payment number" the number 1 is written in the row below payment 0. The amount to be paid monthly is written in the same row, in the column "payment amount". It would be $ 5000 in this example.

In that same row, in the "interest payment" column, the monthly interest rate is multiplied by the unpaid balance prior to this payment, to determine the portion of the interest payment. In this example it would be 0.4% times $ 600,000: $ 2,400.

This amount is subtracted from the interest payment to find the principal payment for this row from the total monthly paid amount. In this example it would be $ 5000 minus $ 2400: $ 2600.

In the column "unpaid balance" of the same row, this principal payment is subtracted from the previous balance to calculate the new unpaid balance. In this example it would be $ 600,000 minus $ 2,600: $ 597,400.

Unpaid loan balance

The process performed for the first payment is repeated for each subsequent payment that has been made. The amount shown in the “unpaid balance” column in the row for the most recent payment is the current unpaid balance of the loan, as highlighted in the image.

Interest on unpaid balances

Credit card companies show the interest rate as a monthly percentage. The interest payable depends on this rate, the unpaid balance, and the number of days the unpaid balance has unpaid.

Interest is charged on the unpaid balance only if the minimum or partial amount is paid on the specified date, not the full amount owed. This is called the revolving credit facility.

There is an interest-free period during which the amount used on the credit card does not earn interest. This is the duration between the first day of the billing cycle and the payment due date.

An additional late fee applies if the amount due is not paid by the specified date. This service tax is applicable to interest and other fees, being included in the total amount owed.

Average daily unpaid balance method

Many credit card companies use an average daily unpaid balance method to calculate the monthly interest applied to a credit card.

The average daily balance method allows a credit card company to charge slightly higher interest; consider cardholder balances throughout the month and not just at the closing date.

By calculating average daily unpaid balances, the credit card company adds the unpaid balances for each day within the monthly billing cycle and divides it by the total number of days.

A daily interest rate is also calculated and charged by the number of days in the billing cycle to arrive at the total monthly interest.

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