Why You Should Stop Making Credit Purchases

Loans and Mortgages — By Shopping Blogs on January 6, 2010 5:48 am

On a page full of loan advice, you may expect to find information about where to get the lowest interest rates, how to apply the perfect amount of collateral or down payment or when to refinance. While these are all important parts financial tips, what you may not expect to read about is when you should not apply for a loan or attempt to make a credit purchase .

Purchasing anything from a wedding ring, to a car and yes, a home, can be done on credit. There are times and circumstances when the burden of making a credit purchase is unwise and even detrimental to your financial stability.

To begin with, if you are already in a tight financial place, although you may feel you can handle the extra payment, unforeseen financial events may put you in a place of choosing which bills get paid and what loans go into default. The stress that financial pressure can cause is not worth the purchase you would make with credit.

If your credit score is very low and you are trying to repair it, taking out more loans may be too risky. If the chance of getting approved is very slim, then save yourself the inquiry mark against your score and try to save the money by setting aside the amount you would have used to repay a loan until you have enough to make the purchase with cash.

Aside from your credit score, lenders will consider your debt to income ratio. If you are already extended beyond a 35 percent, lenders will consider you a high risk and you may want to reconsider making a credit purchase .

To determine your debt to income ratio, add up your total net monthly income. Be sure to include hourly or salary income, commissions, bonuses, alimony or other sources of income.

Separately, add up your monthly debt. This will include home loan payments or rental home fees, car payments, credit card bills, student loans or personal loans, child support or alimony, etc.

To find your debt to income ration, divide your total monthly debt by your total monthly income. Multiply this by 100 and it will display your debt to income ratio percentage.

The average percentage is 35 percent, so if your number is higher than this, it can result in higher interest rates or require larger down payments for lenders offering you a loan.

If you are considering taking out a loan, it may benefit you to pay off a few things and bring your debt to income ratio down a few points. You should speak with the lenders you are considering and ask them how lower debt to income ratios would effect the terms of a loan. Some lenders put more weight on this number than others, and vice a versa.

These were a few financial reasons why it may be wiser not to make a credit purchase until you improve your financial stability or credit score.

However, sometimes life demands that you take out a loan in an emergency or unforeseen event. In these instances, it would benefit you to shop around and ask lenders what they offer to high risk loans or individuals with poor credit. You will most likely pay a higher interest rate or have to put up some collateral for your credit purchase , but if you compare lenders you will be able to choose the terms that meet your needs best.

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