As shiny as your new car is as you drive it off the lot, the luster can disappear if you let it ruin your credit score. If you're considering how to pay for your new car, you need to know how a loan could affect your credit score. After the initial ding caused by inquiries, it's all up to how you handle the loan.
Dings from Inquries
As trustworthy as your smile might be, lenders will want to see your credit score before they give you a car loan. When they pull your credit report, an inquiry will be added to your report, which will lower your credit score. However, if you're doing some rate shopping, your credit score will likely reflect only one inquiry as long as you confine your rate shopping to a short period of time, such as a week or two.
Raising Debt Levels
Creditors know that when you take on more debt you're more likely to run into trouble paying off your debts. When you take out a car loan, you're taking on additional debt that you're going to have to pay back, which will lower your credit score. However, as you pay down the debt, you'll have a smaller proportion of installment loan amounts still owing than you did when you started, which improves your credit score.
Room For Improvement
Financing your car gives you the opportunity to improve on a spotted payment history or continue to show your responsibility in making payments. Your payment history accounts for 35 percent -- the largest factor -- of your credit score. If you are lax in making payments, your credit score is going to suffer as a result.
Mixing it Up
Though some things shouldn't be mixed, different types of credit can be beneficial to your credit score. About 10 percent of your score depends on the different types of credit you've used, so adding a car loan to the mix can help in that area. This is especially true if you've got a short credit history or have only relied on credit cards in the past. However, any positive effects of increasing your mix of credit can easily be overshadowed if you run into trouble making your payments.
Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."