If you’re approved for it, you must be able to afford it

Know what you want to spend before you go shopping.

Many of us are constantly bombarded by offers of pre-approved credit for everything from cars to homes to credit cards and more. In addition, the ads in the paper and on television are geared to get you in the store. Once you’re in the store, if you haven’t done your homework, it can be easy to let a salesperson guide you into buying something that’s too expensive. A common myth is that lenders and creditors would only approve you for credit if you can afford it. However, when you’re applying for new credit, the answer to “Can I afford it?” is maybe.

A salesperson’s job is to sell the goods and services they represent. It’s also their job to maximize the amount of the sale. It is not their job, nor in their best interest, to advise that you cannot afford the purchase. When being approved for credit, the lender and salesperson only know about some of your regular expenses. How do you make sure you don’t buy more than is truly affordable?

First, think about what you want to buy before going to the store or sales showroom. Especially if you are in the market for a new home, think about what’s important before contacting a realtor. List the pros and cons of your purchase and decide what the price range will be for this particular item. Do some research on the internet as to the prices in your area and note the high and low prices. If the purchase is a big ticket item like a car or home, consider getting pre-approved before going shopping.

Another tip is to check your credit before you shop so you know whether you’re being offered a good interest rate on your purchase based on your score and other qualifications. With this knowledge, it’s much harder for a salesperson to tell you they can only offer you a high rate of interest when you know your credit score.

Next, sit down and look honestly at your budget and calculate your debt ratio. Notice that your child care, utility bills, insurance or home maintenance expenses aren’t in the formula used to approve new credit. Debt ratios are calculated using your gross income, or the amount you earn, not what you actually bring home, or net income. Depending on the deductions from your paycheck, the difference between your gross and net income can be significant. Approvals are based on the gross amount so the decision as to affordability is an important one.

Making an informed decision, based on each person’s individual circumstances, can save you from being overextended. Taking these steps can help to avoid costly mistakes down the road.

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