When it comes to borrowing money, there is a lot you need to be aware of before you sign on the dotted line.

1. Your approval is based largely on your credit.

Maintaining excellent credit (i.e. paying your bills on time) is key to being approved for a loan. When you are going through the approval process, the loan officer will also take into account your work history, income, other bank accounts and other debt obligations you may have. Even if you have a few blemishes on your credit, you still may be approved but you should expect to pay a higher interest rate and possibly higher fees.

If there are mistakes on your credit report, you need to clear them up by contacting the credit bureau (Trans Union, Equifax and/or Experian). It is important also that you close any unused credit card accounts and if at all possible, consolidate your credit card debt to several cards. Even if you have $0 balances on your credit cards, having many lines of credit available makes you a high-risk loan because there is nothing that says you won’t max out your accounts tomorrow. If you don’t use it, close it out.

2. Your debt to income ratio is important.

This ratio will be calculated any time you apply for a new loan. Also referred to as DTI, this ratio tells the loan officer how much debt you have in comparison to your income. Let’s assume you have $3,000/month in income and $600 rent payment, $250 car payment and $50 minimum payment on your credit card for total debt of $900. Your debt to income ratio would be calculated as follows:

Debt / Income = $900 / $3,000 = .30 or 30%.

This means that 30% of your income goes towards paying your debt each month. Please note that most banks will use your gross income (before taxes) in this calculation and the only debts that are used will be any regular monthly payments (rent/mortgage, car loans, credit cards, other loans). Your electric, cell phone, cable, etc. will not be included in this calculation. The general rule is that DTI should not be more than 36-40%. By keeping the percentage low, it ensures you have enough money left to pay taxes and other monthly bills (groceries, gas, electricity, etc.)

Many mortgage companies use what is referred to as a back end ratio and a front end ratio. The front-end ratio includes all of your debt except the proposed mortgage payment and should be less than 28% by most standards. The back-end ratio includes all of your debt including your proposed mortgage payment and should not exceed 36% by most standards. When you are pre-qualified for a mortgage loan, your mortgage officer will in all likelihood use these percentages to tell you what size mortgage you can afford. Using the same income as above ($3,000), you would qualify for total debt of $1,080/month ($3,000*36%). With a $250 car payment and $50 credit card payment, you could afford $780/month mortgage payment ($1,080 – $250 – $50 = $780).

3. Watch out for extra fees

Many financing companies, particularly if they are offering a special deal, also usually have hidden fees in the loan. They are required by law to disclose these fees but they certainly won’t focus on it. Be sure you understand all fees associated with your loan before you sign the papers. A common fee and money maker for the financing companies is credit life insurance which pays off your loan in the event that you die. It is expensive coverage and in most cases is not necessary. Remember that nearly all fees are negotiable but they won’t budge if you don’t ask. Question the fees! All loans are required to disclose the interest rate along with the APR. The APR calculates an interest rate including all of the fees associated with the loan. If there is a big difference between the interest rate and the APR, it means there are a lot of fees associated with the loan. Beware!

4. Compare interest rates

There is a great website called bankrate.com that has daily national averages for a variety of loans. To make sure you aren’t being taken by your loan officer, check the rates here and question any differences. You may not get exactly the same rates. But if bankrate.com shows the average interest rate for a new car loan is 7% and they are charging you 12%, you need to find out why.

Research before you make any big purchasing decision and don’t be shy about checking around for the best deal. Do not, however, have everyone in town pulling your credit report to give you a quote. In some cases, many inquiries can adversely effect your chances to be approved as it can appear you have been turned down by those who have inquired about your credit.

The holidays can turn into a very expensive time of year! But it doesn’t have to be that way. By following these tips, you can make sure you aren’t drowning in debt by New Years.

Set A Budget Now

Figure out who you have to buy for and set a maximum amount per gift. Stick to your budget!

Give Homemade Gifts

If you are crafty, consider making some of your holiday gifts. Handmade gifts are often seen as more thoughtful than store bought ones. For those that you receive unexpected gifts from, consider giving homebaked goods, rather than a gift.

Avoid Charging On Credit Cards

Not only will you end up paying a lot more if it’s not paid off right away, you generally will spend more as well. Only spend what you have. No one wants you to go into debt just so they can have a really nice Christmas present.

Draw Name For Gifts

Rather than buying for every person in your extended family or your group of friends or coworkers, suggest drawing names. Most people will be relieved to only have to buy one gift. For extended family, the adults can also make the decision to only buy for the children.

Start Saving Early

Many banks have Christmas Club accounts. It is a savings account that you have a certain amount deposited into each month or each payday. Then when Christmas rolls around, all of your money for gifts is waiting for you and you don’t have to put a huge dent in your monthly budget.

Do you know what your credit score is? Have you ever seen a copy of your credit report? Your credit score is a very important number and can be a deciding factor when you are approaching the bank for a loan or even for a checking account. It is important to be familiar with your credit rating.

There are unscrupulous lenders out there who will try to take advantage of Army families. They will exaggerate your credit rating or charge you enormous amounts of interest due to your credit history. By knowing about your credit score, you can be prepared for these scams and know how to spot it.

Paying bills on time can sometimes be difficult for the Army family. More times than not, this responsibility falls to the Army wife since the husband is gone so much. It is important than you know about all of the bills – amounts, due dates, who they’re payable to, etc. regardless of who pays the bills. Another downside to paying bills in the Army family is the constant moving from base to base. It can sometimes be difficult to keep up with final bills, etc. when a move is happening. But even one missed or late payment can have an adverse effect on your credit rating.

Three credit reporting agencies

There are three credit companies – Experian, Trans Union and Equifax. Most lenders use one company. All three companies should have the same information on you but this is not always the case. That’s why it is very important to check with all three companies.

Request a free report once a year

Each credit reporting agency will give you a free copy of your credit report once a year. Take advantage of this and call for your report. You will need to check it for any discrepancies. If you find mistakes, call them immediately to get the ball rolling in getting them corrected. It can take a considerable amount of time but it is well worth the effort.

Keep your report clean

Your report lists everyone you have an account with, the amount of your payment and if you have made late payments or missed payments. Always make your payments on time! It is much harder to improve your credit rating than it is to keep an excellent one. If your credit is less than perfect, make a commitment now to begin paying bills on time. Once you have 12 months of consistent on-time payments, many lenders will cut you some slack.

It’s there for 7-10 years

Once an item appears on your credit report, it is there for seven to ten years. For instance, if you file for bankruptcy, it will show on your credit report for this amount of time. So each time you go to buy a new car, rent an apartment, buy a house, turn on your electricity, open a bank account, open a new credit card, etc. the business will see that you have filed for bankruptcy. This can hurt your chances of being approved and at the very least you will most likely pay a much higher rate. Think long and hard before you take an action that will show on your credit report.

In a nutshell….

Protect your credit rating – pay on time!

Request a copy of your report once a year.

Clean up mistakes ASAP!

It’s so easy to whip out the plastic when you’re on a shopping spree or out to dinner and worry about paying it at the end of the month. But it can get you in trouble quickly! Many people in America are drowning in thousands of dollars in credit card debt and being eaten alive by their interest rates. Spend wisely.

• Many credit card companies are more than eager to extend credit to you and continually increase your limit. Just because they increased your limit to $20,000, doesn’t mean you can handle $20,000 in credit card debt. The interest rates on these cards can be 18% or higher meaning that if you pay only the minimum payment due on the card, in most cases you aren’t even paying all of the interest that accrued, much less on your actual balance. By paying the minimum payment, you could literally be trying to pay off your card for decades. Not years, decades!

• Do your best to consolidate your credit card debt to one card. One payment is more manageable than several each month. If you’re unable to do this, begin with the card with the highest interest rate and work to get it paid off while paying the minimum balance on your others. When that one is paid off AND you’ve closed the account, move on to the card with the next highest interest rate and so on until you have it down to one card.

• Call your credit card company and negotiate for a lower rate. Tell them you have offers from other companies with lower rates. As long as you have consistently paid on time, many companies will lower your rate but you have to make the call.

• When putting purchases on a credit card, you should be careful. It is very easy to run up debt that sometimes seems impossible to pay off. One of the coolest tricks I’ve heard of (pun intended) is to put your credit card into a container of water and freeze it. If you have the temptation to make a purchase, take your credit card out of the freezer to thaw out. Once it’s thawed, if you still want it, go ahead but I’m willing to bet you will have changed your mind.

• Some people use their credit cards to reap the rewards such as frequent flyer miles. If this is your case, just be sure that whatever you put on the card, you can pay off the balance at the end of the month. If you end up paying monstrous amounts of interest on the balance, then those free miles weren’t as free as they originally appeared to be, were they?

Remember, that you only pay interest if you don’t pay off your card each month. Be responsible with your credit cards and your money. You’ll save yourself lots of late nights worrying and not answering the phones to avoid the collection agencies. Be responsible.

When it comes to saving money, it can be very hard to get started. It is particularly stressful trying to save when you are an Army family. Many times the responsibility of the finances falls on the shoulder of the Army wife simply because your husband is gone so often. It always seems that something comes up that prevents you from being able to save. The best way to keep this from happening in the future is to pay yourself first!

That’s right – you pay yourself before any of your bills get paid. You worked hard for your money and you deserve to be able to reap some of the benefits from it. Now, let me say that I am not saying don’t pay your bills so you can put 10% up. You need to be sure your bills are paid in a timely manner. But paying yourself is important too.

Aim for 10% of your bring home pay as pay for yourself. The best way to accomplish this is to have your paycheck (or his) set up on direct deposit and have 10% automatically deposited into a savings account. That way you will never see it in your checking account.

What if you don’t have 10% of your paycheck to spare? If this is the case, you need to take a good, long look at your spending habits. Living paycheck to paycheck is no fun especially if all you are paying for is the essentials and there’s no “fun” money left at the end of the month.

Check out my articles on budgeting and then look for ways to start paying yourself 10%. You may have to start at a lower percentage and work your way up. But it is possible. Not only will you have a little money put up in savings, this also gives you peace of mind because you will have a reserve in the case of an emergency.

Many financial planners recommend having six months to one year worth of your monthly budget in savings so if an emergency arises or something unexpected such as a layoff presents itself. Saving six months worth of your salary can seem daunting at first but it can be done and you will feel enormous relief knowing there is a cushion if you need it.