After you see the all-leather interior, heated seats and chrome wheels on your prospective new car, your credit score is likely the last thing on your mind. However, how you pay for your new baby could affect those three digits that mean so much to lenders. If you're planning an even bigger purchase in the foreseeable future, such as a home, take steps to ensure you don't hurt your credit score.
If you've decided not to get a money-sucking car loan and paid with cash, check or money order, you've avoided any impact on your credit score. Your credit score only looks at how you handle the debt you incur, not how much money you have in your bank account, how much money you make, or whether you negotiated a really sweet deal on the car. Since you didn't incur any debt to purchase the car when you paid with cash, it doesn't even show up on your credit score. However, if you use a credit card, it's a different story.
Making Car Payments
If you do incur debt to pay for the car, even if it's on a credit card that you pay off in full, your credit score will take notice. Most notably, you have to make at least one payment to pay off the debt, and your payment history counts for 35 percent of your credit score. If you pay your loan off every month as you're supposed to, the loan will help your credit score because it builds your positive credit history. However, if you're delinquent in making payments, your credit score will suffer.
Taking On Extra Debt
When you have outstanding debt, creditors view you as a greater default risk because you have more debt you have to pay off. Your amounts owed are weighted as 30 percent of your credit score. Depending on your other debts and the size of your car loan, your credit score could take a hit. In addition, if you put it all on a credit card, you will be using a significantly large portion of your available credit, which will also harm your credit score.
Adding Variety and Length
The credit scoring algorithm rewards you for using a range of credit types. If you don't have any other installment loans, a car loan could improve the 10 percent of your credit score based on the mix of credit you use. Depending on the term of the loan, over time it could add to your length of credit history, which accounts for an additional 10 percent of your score. However, these small benefits will be lost if you're late on 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."