There's more to Consider than just Qualifying

Whether young or old, rich or not-so-rich, everyone loves to hear to hear those two little words that make the whole credit culture work: "You're approved!" It not only makes you feel privileged, it makes you feel good about yourself. Unfortunately, the problem is that the phrase "You're approved!" can also be the lead-in to another well-known phrase: "You're in over your head." This can apply to a home mortgage, a car or boat loan, a furniture purchase, or credit card accounts. You must remember that loan providers are in business specifically to make loans. That's how they earn money. And you must take into account that the company providing the loan makes more money the longer you take to pay for your purchase. Additionally, the creditor may also make a substantial amount more in penalty fees if you're late with any payments. So, needless to say, it's actually in the loan provider's best interest – and not necessarily yours – to make sure that your credit is approved.

One very common example of this is the 'innocent' call that a retailer will make to you, one of their "preferred customers", to offer to extend your credit limit so that you can purchase that extra piece of clothing (or lawn mower, aquarium, home theater system, etc.) that you had your eye on. But what the merchant fails to tell you is that the increase will have a negative impact on your credit score (because it changes your debt ratio) and could possibly change your interest rate.

A far more destructive example is with home mortgages, where well-intentioned people take on considerably more debt than they can comfortably handle. As a result, the largest percentage of foreclosures occurs within the first 6 months of home ownership. Also, because interest rates have been at their lowest levels in decades, many people have been enticed into buying bigger, more expensive homes simply because they qualified for them. And as long as their mortgages were of the fixed-rate variety, this might not have been much of a problem. But with the recent proliferation of adjustable-rate mortgages, once the rate adjustments begin to take monthly payments prohibitively higher, many more people will be facing the very real prospect of losing their homes.

The bottom line is that you must be responsible for understanding what you can comfortably afford, and this means paying all of your debts on time and credit cards in full each month. Of course, this isn't the advice that lenders will give you (remember, it's really not in their best interest), but it is the wisest advice to act on.

So, what do you do if you're not sure whether you can afford something? Well, check your budget. However, there's a far less technical – but probably just as reliable – method for determining if you should or shouldn't buy. Check your gut intuition; what does it say? If present, that little doubt in the back of your mind is a great indication that you really probably can't afford what you're about to do. Remember, there will always be things to buy down the road. If your stomach is queasy just one little bit at the thought of a loan, walk away from it.