Posts Tagged ‘Credit’

Average Outstanding Balance on Credit Cards: Calculation, FAQs

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What Is Average Outstanding Balance?

An average outstanding balance is the unpaid, interest-bearing balance of a loan or loan portfolio averaged over a period of time, usually one month. The average outstanding balance can refer to any term, installment, revolving, or credit card debt on which interest is charged. It may also be an average measure of a borrower’s total outstanding balances over a period of time.

Average outstanding balance can be contrasted with average collected balance, which is that part of the loan that has been repaid over the same period.

Key Takeaways

  • The average outstanding balance refers to the unpaid portion of any term, installment, revolving, or credit card debt on which interest is charged over some period of time.
  • Interest on revolving loans may be assessed based on an average balance method.
  • Outstanding balances are reported by credit card companies to consumer credit bureaus each month for use in credit scoring and credit underwriting.
  • Average outstanding balances can be calculated based on daily, monthly, or some other time frame.
  • Large outstanding balances can be an indicator of financial trouble for both lenders and borrowers.

Understanding Average Outstanding Balance

Average outstanding balances can be important for several reasons. Lenders often have a portfolio of many loans, which need to be assessed in aggregate in terms of risk and profitability. Banks use the average outstanding balance to determine the amount of interest they pay each month to their account holders or charge to their borrowers. If a bank has a large outstanding balance on its lending portfolio it could indicate that they are having trouble collecting on their loans and may be a signal for future financial stress.

Many credit card companies also use an average daily outstanding balance method for calculating interest applied to a revolving credit loan, particularly credit cards. Credit card users accumulate outstanding balances as they make purchases throughout the month. An average daily balance method allows a credit card company to charge slightly higher interest that takes into consideration a cardholder’s balances throughout the past days in a period and not just at the closing date.

For borrowers, credit rating agencies will review a consumer’s outstanding balances on their credit cards as part of determining a FICO credit score. Borrowers should show restraint by keeping their credit card balances well below their limits. Maxing out credit cards, paying late, and applying for new credit increases one’s outstanding balances and can lower FICO scores.

Interest on Average Outstanding Balances 

With average daily outstanding balance calculations, the creditor may take an average of the balances over the past 30 days and assess interest on a daily basis. Commonly, average daily balance interest is a product of the average daily balances over a statement cycle with interest assessed on a cumulative daily basis at the end of the period.

Regardless, the daily periodic rate is the annual percentage rate (APR) divided by 365. If interest is assessed cumulatively at the end of a cycle, it would only be assessed based on the number of days in that cycle.

Other average methodologies also exist. For example, a simple average may be used between a beginning and ending date by dividing the beginning balance plus the ending balance by two and then assessing interest based on a monthly rate.

Credit cards will provide their interest methodology in the cardholder agreement. Some companies may provide details on interest calculations and average balances in their monthly statements.

Because the outstanding balance is an average, the period of time over which the average is computed will affect the balance amount.

Consumer Credit

Outstanding balances are reported by credit providers to credit reporting agencies each month. Credit issuers typically report a borrower’s total outstanding balance at the time the report is provided. Some credit issuers may report outstanding balances at the time a statement is issued while others choose to report data on a specific day each month. Balances are reported on all types of revolving and non-revolving debt. With outstanding balances, credit issuers also report delinquent payments beginning at 60 days past due.

Timeliness of payments and outstanding balances are the top factors that affect a borrower’s credit score. Experts say borrowers should strive to keep their total outstanding balances below 30%. Borrowers using more than 30% of total available debt outstanding can easily improve their credit score from month to month by making larger payments that reduce their total outstanding balance.

When the total outstanding balance decreases, a borrower’s credit score improves. Timeliness, however, is not as easy to improve since delinquent payments are a factor that can remain on a credit report for seven years.

Average balances are not always a part of credit scoring methodologies. However, if a borrower’s balances are drastically changing over a short period of time due to debt repayment or debt accumulation, there will typically be a lag in total outstanding balance reporting to the credit bureau’s which can make tracking and assessing real-time outstanding balances difficult.

Calculating Average Outstanding Balance

Lenders typically calculate interest on revolving credit, such as credit cardsor lines of credit, using an average of daily outstanding balances. The bank adds all the daily outstanding balances in the period (usually a month) and divides this sum by the number of days in the period. The result is the average outstanding balance for the period.

For loans that are paid monthly, such as mortgages, a lender may instead take the arithmetic mean of the starting and ending balance for a statement cycle. For instance, say a home borrower has a mortgage balance of $100,000 at the start of the month and makes a payment on the 30th of the same month, reducing the outstanding principal amount to $99,000. The average outstanding balance for the loan over that period would be ($100,000-99,000)/2 = $99,500.

Frequently Asked Questions

What is an outstanding balance?

An outstanding balance is the total amount still owed on a loan.

What is an outstanding principal balance?

This is the amount of a loan’s principal amount (i.e. the dollar amount initially loaned) that is still due, and does not take into account the interest or any fees that are owed on the loan.

Where can I find my outstanding balance?

Borrowers can find this information on their regular bank or loan statements. They can also usually be pulled up from a lender’s website for viewing at any time.

What is the difference between outstanding balance and remaining balance?

Outstanding balance refers to the amount still owed on a loan from the perspective of a borrower or lender. Remaining balance instead refers to how much money remains in an account after spending or a withdrawal, from the perspective of a saver or savings bank.

What percentage of an outstanding balance is a minimum payment?

Some lenders charge a fixed percentage, such a 2.5%. Others will charge a flat fee plus a fixed percentage, such as $20 + 1.75% of the outstanding balance as the minimum payment due. Penalty fees like late fees, as well as past due amounts, will typically be added to the calculation. This would increase your minimum payment significantly.

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Adjustable Life Insurance: Definition, Pros & Cons, Vs. Universal

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Adjustable Life Insurance: Definition, Pros & Cons, Vs. Universal

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What Is Adjustable Life Insurance?

Adjustable life insurance is a hybrid of term life and whole life insurance that allows policyholders the option to adjust policy features, including the period of protection, face amount, premiums, and length of the premium payment period.

Adjustable life policies also incorporate an interest-bearing savings component, known as a “cash value” account.

Key Takeaways

  • Adjustable life insurance allows policyholders to make changes to their cash value, premiums, and death benefits.
  • It gives policyholders the ability to reformulate their insurance plans based on shifting life events.
  • There is a savings component, known as a “cash value” account, with adjustable life insurance.
  • When the cash value in an adjustable life insurance policy grows, the policyholder may borrow from it or use it to pay their premiums.
  • The cash value earns interest often at a guaranteed rate, but the interest gains are usually modest.

Understanding Adjustable Life Insurance

Adjustable life insurance differs from other life insurance products in that there is no requirement to cancel or purchase additional policies as the insured’s circumstances change. It is attractive to those who want the protection and cash value benefits of permanent life insurance yet need or want some flexibility with policy features.

Using the ability to modify premium payments and face amounts, policyholders may customize their coverage as their lives change. For example, a policyholder may want to increase the face amount upon getting married and having children. An unemployed person may want to reduce premiums to accommodate a restricted budget.

As with other permanent life insurance, adjustable life insurance has a savings component that earns cash value interest, usually at a guaranteed rate. Policyholders are permitted to make changes to critical features of their policy within limits. They may increase or decrease the premium, increase or decrease the face amount, extend or shorten the guaranteed protection period, and extend or shorten the premium payment period.

Adjustments to the policy will alter the guaranteed period of the interest rate, and changes in the length of the guarantee will change the cash value schedule. Decreasing the face amount is done upon request or in writing. However, increasing the face amount may require additional underwriting, with substantial increases requiring full medical underwriting.

Increasing the amount of the death benefit could require additional underwriting, and substantial increases may call for full medical underwriting, which would mean an updated medical exam.

Factors That Can Be Adjusted

Three factors can be changed in an adjustable life insurance policy. These are the premium, cash value, and death benefit. All three elements can be adjusted because this policy is a permanent life insurance policy and does not expire, like a term life policy.

Premiums can be changed by frequency or amount of payments, as long as you pay above the minimum cost. The policy’s cash value can be increased by upping your premium payments. You can decrease your cash amount if you withdraw funds or use the cash in the policy to pay the premiums.

Finally, you can adjust your death benefit by decreasing or adding to the amount. If you decide to add a significant amount to the death benefit due to a life event like the birth of a child, your premiums may go up based on the new benefit amount. In some cases, your policy will have to undergo additional underwriting.

Advantages and Disadvantages of Adjustable Life Insurance

Adjustable life insurance gives policyholders more flexibility than term life insurance, but it is more expensive than a simple 20- or 30-year term policy. If you plan on using adjustable life insurance as an investment vehicle, you may be better off with a tool that earns more interest. Adjustable life insurance only provides modest amounts of interest growth.

Pros

  • Cash value grows over time

  • You can decrease or increase your death benefit

  • The most flexible of all types of life insurance

Cons

  • Is expensive to purchase

  • Interest earnings may be modest

  • If you largely increase your death benefit, your premiums may rise

Guidelines for Life Insurance Policies and Riders

Internal Revenue Code (IRC) Section 7702 defines the characteristics of and guidelines for life insurance policies. Subsection C of this section provides guidelines for premium payments. The policyholder may not adjust the premiums in a manner that violates these guidelines. Increasing premiums may also increase the face amount to the point that it requires evidence of insurability.

However, many life insurers set parameters to prevent violations. Adjustable life insurance policies typically have optional riders. Familiar ones include the waiver of premium and accidental death and dismemberment riders.

What Is the Difference Between Adjustable Life Insurance and Universal Life Insurance?

Adjustable life insurance is another name for universal life insurance. There is no difference between them, because they are the same type of policy.

What Does an Adjustable Life Policy Allow a Policy Owner to Do?

An adjustable life policy allows a policy owner to make changes to the death benefit amount, adjust their payment on their premiums, and add money or remove money from their cash value.

What Is Credit Life Insurance?

Credit life insurance may be offered when you take out a large loan, such as a mortgage. This type of life insurance is used to pay the loan off if the borrower dies before the loan is repaid. For example, if you co-sign a 30-year mortgage with your spouse, and your spouse dies 10 years into the mortgage, the mortgage would be paid in full by the credit life insurance policy. Credit life insurance can protect co-signers, whose partner or spouse might not be able to afford to keep up with payments on their own.

The Bottom Line

Adjustable life policies provide the flexibility that most traditional policies do not. However, the frequency of allowable adjustments is restricted within set time frames. Requests must be made within an allotted period and meet the guidelines set by the insurer.

The variability in adjustments can create a policy that mirrors either term life insurance or whole life insurance. Effectively, adjustable life insurance policies allow policyholders to customize their life insurance to meet current or anticipated needs.

As with any kind of permanent policy, it’s critical to research every firm that’s being considered to ensure that they’re among the best life insurance companies currently operating.

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Advance Payment: What It Is, How It Works, Examples

Written by admin. Posted in A, Financial Terms Dictionary

Advance Payment: What It Is, How It Works, Examples

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What Is an Advance Payment?

Advance payment is a type of payment made ahead of its normal schedule such as paying for a good or service before you actually receive it. Advance payments are sometimes required by sellers as protection against nonpayment, or to cover the seller’s out-of-pocket costs for supplying the service or product.

There are many cases where advance payments are required. Consumers with bad credit may be required to pay companies in advance, and insurance companies generally require an advance payment in order to extend coverage to the insured party.

Key Takeaways

  • Advance payments are made before receiving a good or service.
  • In many cases, advance payments protect the seller against nonpayment in case the buyer doesn’t come and pay at the time of delivery.
  • Companies record advance payments as assets on their balance sheets.
  • A prepaid cell phone is an example of an advance payment.

Understanding Advance Payments

Advance payments are amounts paid before a good or service is actually received. The balance that is owed, if any, is paid once delivery is made. These types of payments are in contrast to deferred payments—or payments in arrears. In these cases, goods or services are delivered first, then paid for later. For example, an employee who is paid at the end of each month for that month’s work would be receiving a deferred payment.

Advance payments are recorded as assets on a company’s balance sheet. As these assets are used, they are expended and recorded on the income statement for the period in which they are incurred.

Advance payments are generally made in two situations. They can be applied to a sum of money provided before a contractually agreed-upon due date, or they may be required before the receipt of the requested goods or services.

Advance Payment Guarantees

An advance payment guarantee serves as a form of insurance, assuring the buyer that, should the seller fail to meet the agreed-upon obligation of goods or services, the advance payment amount will be refunded to the buyer. This protection allows the buyer to consider a contract void if the seller fails to perform, reaffirming the buyer’s rights to the initial funds paid.

Governments also issue advance payments to taxpayers like Social Security.

Special Considerations: Advance Payments to Suppliers

In the corporate world, companies often have to make advance payments to suppliers when their orders are large enough to be burdensome to the producer. This is especially true if the buyer decides to back out of the deal before delivery.

Advance payments can assist producers who do not have enough capital to buy the materials to fulfill a large order, as they can use part of the money to pay for the product they will be creating. It can also be used as an assurance that a certain amount of revenue will be brought in by producing the large order. If a corporation is required to make an advance payment, it is recorded as a prepaid expense on the balance sheet under the accrual accounting method.

Examples of Advance Payments

There are many examples of advance payments in the real world. Take prepaid cell phones, for example. Service providers require payment for cell services that will be used by the customer one month in advance. If the advance payment is not received, the service will not be provided. The same applies to payments for upcoming rent or utilities before they are contractually due.

Another example applies to eligible U.S. taxpayers who received advance payments through the Premium Tax Credit (PTC) offered as part of the Affordable Care Act (ACA). The financial assistance helps citizens, that meet household income requirements, pay for their health insurance. The money due to the taxpayer is paid to the insurance company in advance of the actual due date for the credit.

The American Rescue Plan, signed by President Biden on March 11, 2021, made some changes to the ACA Premium Tax Credit. All taxpayers with insurance bought on the Marketplace are now eligible for this credit in 2021 and 2022; previously, filers were ineligible if their income exceeded 400% of the federal poverty line.

Consumers with bad credit may also be required to provide creditors with advance payments before they can purchase goods or services.

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Additional Child Tax Credit (ACTC): Definition and Who Qualifies

Written by admin. Posted in A, Financial Terms Dictionary

Additional Child Tax Credit (ACTC): Definition and Who Qualifies

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What Is the Additional Child Tax Credit?

The additional child tax credit was the refundable portion of the child tax credit. It could be claimed by families who owed the IRS less than their qualified child tax credit amount. Since the child tax credit was non-refundable, the additional child tax credit refunded the unused portion of the child tax credit to the taxpayer. This provision was eliminated from 2018 to 2025 by the Tax Cuts and Jobs Act (TCJA).

However, under the TCJA, the child tax credit includes some provisions for refundable credits. In addition, on March 11, 2021, President Biden’s American Rescue Plan was voted into law and made child tax credits fully refundable in 2021.

Key Takeaways

  • The additional child tax credit was the refundable portion of the child tax credit.
  • It could be claimed by families who owed the IRS less than their qualified child tax credit amount.
  • The additional child tax credit was eliminated for 2018 to 2025 by the Tax Cuts and Jobs Act,
  • Child tax credits for 2021, however, were made fully refundable as part of the American Rescue Plan.
  • For 2021, advance child tax credits could be claimed via monthly payments in the amount of half of their total child tax credit. The second half can be claimed by those eligible on their 2021 tax returns.

Tax Deductions Vs. Tax Credits

Understanding the Additional Child Tax Credit

A tax credit is a benefit given to eligible taxpayers to help reduce their tax liabilities. If Susan’s tax bill is $5,550 but she qualifies for a $2,500 tax credit, she will only have to pay $3,050. Some tax credits are refundable, meaning that if the tax credit amounts to more than what is owed as tax, the individual will receive a refund. If Susan’s tax credit is actually $6,050 and is refundable, she will be given a check for $6,050 – $5,550 = $500.

Depending on what tax group a taxpayer falls in, they may be eligible to claim a tax credit. For example, taxpayers with children may qualify for the child tax credit which helps to offset the costs of raising kids.

For the 2022 through 2025 tax year, the child tax credit allows eligible tax filers to reduce their tax liability by up to $2,000 per child. To be eligible for the child tax credit, the child or dependent must:

  • Be 16 years or younger by the end of the tax year
  • Be a U.S. citizen, national, or resident alien
  • Have lived with the taxpayer for more than half of the tax year
  • Be claimed as a dependent on the federal tax return
  • Not have provided more than half of their own financial support
  • Have a Social Security number

Child Tax Credit vs. Additional Child Tax Credit

Previously, the child tax credit was non-refundable, which means the credit could reduce a taxpayer’s bill to zero, but any excess from the credit would not be refunded. Families who wanted to keep the unused portion of the child tax credit could go the route of another available tax credit called the additional child tax credit.

This credit was a refundable tax credit that families could qualify for if they already qualified for the non-refundable child tax credit. The additional child tax credit was ideal for families who owed less than the child tax credit and wanted to receive a refund for the surplus credit.

While the additional child tax credit was eliminated in 2018 under the Tax Cuts and Jobs Act (TCJA), up to $1,400 of the $2,000 child tax credit can be refundable for each qualifying child if certain conditions are met. For example, a taxpayer needs to earn more than $2,500 for the tax year to qualify for any refund. To claim a refund, filers must complete Schedule 8812.

The American Rescue Plan created major changes to the child tax credit for 2021. The maximum credit rose to $3,000 (children up to 17) or $3,600 (children younger than six). Qualifying families started receiving monthly checks (half of the full credit) in July 2021. The credit also became fully refundable in 2021, and families may claim the second half of the credit on their 2021 tax return. This child-related tax benefit begins to phase out for individual filers with children who earn more than $75,000 and joint filers earning more than $150,000.

The additional child tax credit in its previous form was eliminated from 2018 to 2025 by the Tax Cuts and Jobs Act (TCJA).

Example of the Additional Child Tax Credit

Before the TCJA, the IRS allowed families with an annual income of more than $3,000 to claim a refund using the additional child tax credit. The tax credit depended on how much the taxpayer earned and was calculated by taking 15% of the taxpayer’s taxable earned income over $3,000 up to the maximum amount of the credit, which was then $1,000 per child. The total amount above $3,000 (subject to annual adjustments for inflation) was refundable.

For example, a taxpayer with two dependents qualifies for the child tax credit. Their earned income is $28,000, which means income over $3,000 is $25,000. Since 15% x $25,000 = $3,750 is greater than the maximum credit of $2,000 for two kids, they would have received the full portion of any unused credit.

So if the taxpayer received an $800 child tax credit, they would be refunded a $1,200 Additional child tax credit. However, if the taxable earned income was $12,000 instead, 15% of this amount over $3,000 is 15% x $9,000 = $1,350. Because the refundable portion of the credit cannot exceed 15% of earned income above $3,000, the taxpayer would receive a maximum refund of $1,350, not $2,000.

Taxpayers who were residents of Puerto Rico with income below $3,000 were eligible if they had at least three qualifying dependents and paid Social Security tax in excess of the amount of their earned-income credit for the year.

What Is the Difference Between Child Tax Credit and Additional Child Tax Credit?

Under President Biden’s 2021 American Rescue Plan, the child tax credit offers a maximum credit of $3,600 (younger than six years of age) and $3,000 (over age six and up to age 17) to those families who meet eligibility requirements. The additional child tax credit (up to $2,000 per child) was eliminated in 2018 under the Tax Cuts and Jobs Act (TCJA).

Is the New Child Tax Credit for 2020 or 2021?

President Biden’s new child tax credit is based on 2020 tax returns and will be used when you file 2021 taxes in April 2022. The changes to the child tax credit apply (as of July 2021) for the tax year 2021 only, unless they are extended.

Who Qualifies for the Additional Child Tax Credit?

The additional child tax credit was eliminated in 2018, so no one at present qualifies for the additional child tax credit. However, the full new child tax credit is offered to parents (who file jointly) who make up to $150,000 a year.

Are There Additional Requirements for the 2021 Child Tax Credit?

To qualify for advanced payments for the 2021 tax year to receive the Economic Impact Payment, had a main home in the U.S. for more than half the year (or file a joint return with a spouse who has a main home in the United States for more than half the year), have a qualifying child who is under age 18 at the end of 2021 and who has a valid Social Security number, and made less than certain income limits.

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